EC 302 Test 2

Exhibit: Policies Influence Real Exchange Rate Reference: Ref 6-2 (Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of an increase in household saving? (A) (B) (C) (D)

(A) Vertical (S) line increases, decreasing NX and decreasing R*

If 250 workers are unemployed for a period of 1 month, 150 for the period of 6 months and 100 for the period of 12 months in a given year, how many spells and months of unemployment occur during a year?

250*1+150*6+100*12= 3350

Explain how paying efficiency wages can help employers overcome both moral hazard and adverse selection problems in employment.

By paying wages that are competitive or better then other similar firms, an employer is able to motivate their employees to contribute more work, and stay with the firm longer because of the pay benefit.

If the per-worker production function is given by y = k1/2, the saving rate (s) is 0.2, and the depreciation rate is 0.1, then the steady-state ratio of capital to labor is: a. 1. b. 2. c. 4. d. 9.

C. 4 s(y)=dk s(k^1/2)=dk s/d=k/k^1/2 .2/.1=k^1/2 2=k^1/2 2^2=k k=4

Explain why government budget deficits crowd out private investment spending in a closed economy, but crowd out net exports in a small open economy. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.

In the small open economy, the budget deficits lead to an reduction in net capital outflow which causes the real exchange rate to increase and crowd out net exports because of this increased exchange rate. In a closed economy, the budget deficit leads to an increase in the interest rate and leads to a decrease in national savings therefor crowding out private investment.

Why is purchasing power parity called "the law of one price"? Explain.

The law of one price is the economic theory that the price of a given security, commodity or asset has the same price when exchange rates are taken into consideration, which is exactly what purchasing power is saying in terms of a countries "basket of goods"

In an economy, if 5 percent of the employed lose their job every month (s = 0.05) while 15 percent of the unemployed find a job every month (f = 0.15), what is the steady rate of unemployment of the economy?

U=s/(s+f) =.05/(.20) Steady state unemployment = .25 or 25%

If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis, then the real exchange rate is determined by the intersection of the ______ net-exports schedule and the ______ line representing saving minus investment. a. downward-sloping; vertical b. upward-sloping; vertical c. downward-sloping; upward-sloping d. upward-sloping; downward-sloping

a. downward-sloping; vertical

The natural rate of unemployment is: a. the average rate of unemployment around which the economy fluctuates. b. about 10 percent of the labor force. c. a rate that never changes. d. the transition of individuals between employment and unemployment.

a. the average rate of unemployment around which the economy fluctuates.

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals: a. -$25 billion. b. -$10 billion. c. $10 billion. d. $25 billion.

b. -$10 billion.

If the number of employed workers equals 200 million and the number of unemployed workers equals 20 million, the unemployment rate equals ______ percent (rounded to the nearest percent). a. 0 b. 9 c. 10 d. 20

b. 9 (220/20)

Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate. a. does not change; increases b. increases; increases c. increases; decreases d. decreases; increases

b. increases; increases

Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. The production functions in both economies exhibit diminishing marginal product of capital. An extra unit of capital per worker increases output per worker: a. more in Highland. b. more in Lowland. c. by the same amount in Highland and Lowland. d. in Highland, but not in Lowland.

b. more in Lowland.

Discouraged workers are counted as: a. part of the labor force. b. out of the labor force. c. employed. d. unemployed.

b. out of the labor force.

The steady-state level of capital occurs when the change in the capital stock (Δk) equals: a. 0. b. the saving rate. c. the depreciation rate. d. the population growth rate.

a. 0.

Unions contribute to structural unemployment when collective bargaining results in wages: a. above the equilibrium level. b. below the minimum wage. c. below the equilibrium level. d. above the level of unemployment compensation.

a. above the equilibrium level.

Net exports equal GDP minus domestic spending on: a. all goods and services. b. all goods and services plus foreign spending on domestic goods and services. c. domestic goods and services. d. domestic goods and services minus foreign spending on domestic goods and services.

a. all goods and services.

An appreciation of the real exchange rate in a small open economy could be the result of: a. an increase in government spending. b. an increase in taxes. c. a decrease in the world interest rate. d. the expiration of an investment tax-credit provision.

a. an increase in government spending.

In a small, open economy if net exports are negative, then: a. domestic spending is greater than output. b. saving is greater than investment. c. net capital outflows are positive. d. imports are less than exports.

a. domestic spending is greater than output.

In a small open economy, if the government encourages investment, through, say, an investment tax credit, investment: a. increases and is financed through an increase in national saving. b. increases and is financed through an increase in exports. c. increases and is financed through an inflow of foreign capital. d. does not increase; the interest rate rises instead.

c. increases and is financed through an inflow of foreign capital.

Assume two economies are identical in every way except that one has a higher population growth rate. According to the Solow growth model, in the steady state the country with the higher population growth rate will have a ______ level of output per person and ______ rate of growth of output per worker as/than the country with the lower population growth rate. a. higher; the same b. higher; a higher c. lower; the same d. lower; a lower

c. lower; the same

The Solow model with population growth but no technological change cannot explain persistent growth in standards of living because: a. total output does not grow. b. depreciation grows faster than output. c. output, capital, and population all grow at the same rate in the steady state. d. capital and population grow, but output does not keep up.

c. output, capital, and population all grow at the same rate in the steady state.

When there is structural unemployment, the real wage is: a. rigid at a level below the market-clearing level. b. rigid at the market-clearing level. c. rigid at a level above the market-clearing level. d. flexible.

c. rigid at a level above the market-clearing level.

If net capital outflow is positive, then: a. exports must be positive. b. exports must be negative. c. the trade balance must be positive. d. the trade balance must be negative.

c. the trade balance must be positive.

Examples of "active" labor-market policies include all of the following except: a. job-search assistance b. subsidized employment c. unemployment insurance d. job-training programs

c. unemployment insurance

If wage rigidity holds the real wage above the equilibrium level, an increase in the supply of labor will ______ the number unemployed. a. increase b. decrease c. not change d. possibly increase, decrease, or leave unchanged

a. increase

When insiders have a much greater impact on the wage-bargaining process than do outsiders, the negotiated wage is likely to be ______ the equilibrium wage. a. much greater than b. much less than c. almost equal to d. about one-half of

a. much greater than

In a large open economy, if an import quota is adopted, then: a. net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate rises. b. net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate falls. c. net exports rise and the real exchange rate rises. d. net exports rise and the real exchange rate falls.

a. net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate rises.

In the small open economy in equilibrium: a. saving is fixed, and investment is determined by the investment function and the world interest rate. b. investment is fixed, and saving is determined by the saving function and the world interest rate. c. saving is fixed, and investment is determined by the trade balance. d. investment is fixed, and saving is determined by the trade balance.

a. saving is fixed, and investment is determined by the investment function and the world interest rate.

According to Malthus, large populations: a. require the capital stock to be spread thinly, thereby reducing living standards. b. place great strains on an economy's productive resources, resulting in perpetual poverty. c. are a prerequisite for technological advances and higher living standards. d. are not a factor in determining living standards.

b. place great strains on an economy's productive resources, resulting in perpetual poverty.

Economists call the changes in the composition of demand among industries and regions: a. insider-outsider conflicts. b. sectoral shifts. c. moral hazard. d. adverse selection.

b. sectoral shifts.

In the Solow growth model with population growth, but no technological progress, in the Golden Rule steady state, the marginal product of capital minus the rate of depreciation will equal: a. 0. b. the population growth rate. c. the saving rate. d. output per worker.

b. the population growth rate.

All of the following are reasons for frictional unemployment except: a. workers have different preferences and abilities. b. unemployed workers accept the first job offer that they receive. c. the flow of information is imperfect. d. geographic mobility takes time

b. unemployed workers accept the first job offer that they receive.

All of the following are reasons for frictional unemployment except: a. workers have different preferences and abilities. b. unemployed workers accept the first job offer that they receive. c. the flow of information is imperfect. d. geographic mobility takes time.

b. unemployed workers accept the first job offer that they receive.

Economists who have studied minimum-wage laws in the United States find that a 10 percent increase in the minimum wage increases teenage unemployment by about: a. 10 to 30 percent. b. 5 percent. c. 1 to 3 percent. d. 0 percent.

c. 1 to 3 percent.

Assume two economies are identical in every way except that one has a higher saving rate. According to the Solow growth model, in the steady state the country with the higher saving rate will have ______ level of output per person and ______ rate of growth of output per worker as/than the country with the lower saving rate. a. the same; the same b. the same; a higher c. a higher; the same d. a higher; a higher

c. a higher; the same

According to Kremer, large populations: a. require the capital stock to be spread thinly, thereby reducing living standards. b. place great strains on an economy's productive resources, resulting in perpetual poverty. c. are a prerequisite for technological advances and higher living standards. d. are not a factor in determining living standards.

c. are a prerequisite for technological advances and higher living standards.

If the rate of separation is 0.02 and the rate of job finding is 0.08 but the current unemployment rate is 0.10, then the current unemployment rate is ______ the equilibrium rate, and in the next period it will move ______ the equilibrium rate. a. above; toward b. above; away from c. below; toward d. below; away from

c. below; toward

Assume that a war reduces a country's labor force but does not directly affect its capital stock. If the economy was in a steady state before the war and the saving rate does not change after the war, then, over time, capital per worker will ______ and output per worker will ______ as it returns to the steady state. a. decline; increase b. increase; increase c. decline; decrease d. increase; decrease

c. decline; decrease

In the Solow growth model, if investment is less than depreciation, the capital stock will ______ and output will ______ until the steady state is attained. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase

c. decrease; decrease

If the national saving rate increases, the: a. economy will grow at a faster rate forever. b. capital-labor ratio will increase forever. c. economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached. d. capital-labor ratio will eventually decline.

c. economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached.

In a small open economy with perfect capital mobility, the real interest rate will always be: a. above the world real interest rate. b. below the world real interest rate. c. equal to the world real interest rate. d. equal to the world nominal interest rate.

c. equal to the world real interest rate.

If an economy with no population growth or technological change has a steady-state MPK of 0.1, a depreciation rate of 0.1, and a saving rate of 0.2, then the steady-state capital stock: a. is greater than the Golden Rule level. b. is less than the Golden Rule level. c. equals the Golden Rule level. d. could be either above or below the Golden Rule level.

c. equals the Golden Rule level.

The Solow growth model describes: a. how output is determined at a point in time. b. how output is determined with fixed amounts of capital and labor. c. how saving, population growth, and technological change affect output over time. d. the static allocation, production, and distribution of the economy's output.

c. how saving, population growth, and technological change affect output over time.

If the real exchange rate depreciates from 1 Japanese good per U.S. good to 0.5 Japanese good per U.S. good, then U.S. exports ______ and U.S. imports ______. a. increase; increase b. decrease; decrease c. increase; decrease d. decrease; increase

c. increase; decrease

If the steady-state rate of unemployment equals 0.10 and the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.02, then the fraction of unemployed workers who find jobs each month (the rate of job findings) must be: a. 0.02. b. 0.08. c. 0.10. d. 0.18.

d. 0.18.

A trade deficit can be financed in all of the following ways except by: a. borrowing from foreigners. b. selling domestic assets to foreigners. c. selling foreign assets owned by domestic residents to foreigners. d. borrowing from domestic lenders.

d. borrowing from domestic lenders.

The Golden Rule level of capital accumulation is the steady state with the highest level of: a. output per worker. b. capital per worker. c. savings per worker. d. consumption per worker.

d. consumption per worker.

The U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with high inflation rates relative to the United States has tended to ______, and the U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with low inflation rates relative to the United States has tended to ______. a. appreciate; appreciate b. appreciate; depreciate c. depreciate; depreciate d. depreciate; appreciate

d. depreciate; appreciate

In a large open economy, the interest rate adjusts so that domestic saving equals: a. domestic investment. b. net exports. c. net capital outflow. d. domestic investment plus net capital outflow.

d. domestic investment plus net capital outflow.

Economist Robert Barro attributes the increase in the duration of unemployment to ______, while economist Paul Krugman attributes the increased duration to _____. a. increased immigration of low-wage workers; tax cuts given to high-wage workers b. contractionary monetary policy; expansionary fiscal policy c. high marginal tax rates on the wealthy; high marginal tax rates on low-wage workers d. expanded unemployment-insurance coverage; insufficient consumer demand

d. expanded unemployment-insurance coverage; insufficient consumer demand

If an economy is in a steady state with no population growth or technological change and the capital stock is below the Golden Rule: a. a policymaker should definitely take all possible steps to increase the saving rate. b. if the saving rate is increased, output and consumption per capita will both rise, both in the short and long runs. c. if the saving rate is increased, output per capita will at first decline and then rise above its initial level, and consumption per capita will rise both in the short and long runs. d. if the saving rate is increased, output per capita will rise and consumption per capita will first decline and then rise above its initial level.

d. if the saving rate is increased, output per capita will rise and consumption per capita will first decline and then rise above its initial level.

Assume that a country experiences a reduction in productivity that lowers the marginal product of labor for any given level of labor. In this case, the: a. labor supply curve shifts to the right. b. labor supply curve shifts to the left. c. labor demand curve shifts upward and to the right. d. labor demand curve shifts downward and to the left.

d. labor demand curve shifts downward and to the left.

If an economy is in a steady state with no population growth or technological change and the capital stock is above the Golden Rule level and the saving rate falls: a. output, consumption, investment, and depreciation will all decrease. b. output and investment will decrease, and consumption and depreciation will increase. c. output and investment will decrease, and consumption and depreciation will increase and then decrease but finally approach levels above their initial state. d. output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state.

d. output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state.

Efficiency-wage theories suggest that a firm may pay workers more than the market-clearing wage for all of the following reasons except to: a. reduce labor turnover. b. improve the quality of the firm's labor force. c. increase worker effort. d. reduce the firm's wage bill.

d. reduce the firm's wage bill.

An "open" economy is one in which: a. the level of output is fixed. b. government spending exceeds revenues. c. the national interest rate equals the world interest rate. d. there is trade in goods and services with the rest of the world.

d. there is trade in goods and services with the rest of the world.

In the model of the steady-state unemployment rate with a fixed labor force, the rate of job finding equals the percentage of the ______ who find a job each month, while the rate of job separation equals the percentage of the ______ who lose their job each month. a. labor force; labor force b. labor force; unemployed c. employed; labor force d. unemployed; employed

d. unemployed; employed