EC 308 HW Review

In a Cobb-Douglas production function, the factor share of income going to each input is equal to the exponent on the input in the production function. Answers: True False

Correct True

f nominal GDP grew by 7% in year 2 relative to year 1, the price level increased by 2% during the same period and the real GDP in year 1 was $1,000, what was real GDP in year 2? Selected Answer: Correcta. $1,050 Answers: a. $1,050 b. $1,100 c. $1,000 d. $1,020

Correcta. $1,050

How quickly GDP doubles will depend on: Selected Answer: Answers: a. all of these b. the initial value of GDP. c. the growth rate of GDP. d. the current value of GDP.

Correctc. the growth rate of GDP.

A recession is usually declared to be over when short-run output returns to potential output. True False

False

According to the quantity theory of money, increases in the money supply and in real GDP will cause inflation. True False

False

An increase in the aggregate demand parameter for imports will shift the IS curve in the same direction as an increase in the aggregate demand parameter for consumption. True False

False

Capital per person explains about one-half of the difference in per capita income between the richest and poorest countries. True False

False

Given the choice between free labor mobility and free capital mobility, the Solow model implies that free capital mobility is more effective at improving welfare. True False

False

If 130 yen were required to purchase a dollar, and ten years later only 100 yen are required to purchase a dollar, we can say that the yen has depreciated. True False

False

If an economy has a higher investment rate and a higher depreciation rate, the economy will have a higher level of output. True False

False

If the economy begins at its long-run values and the parameter b̄ increases, short-run output will increase. True False

False

Price differences over time are actually larger than the raw difference in prices between any two years, because inflation has eroded the value of the dollar over time. True False

False

The Solow model is a static model and thus can only tell us the levels of our endogenous variables in steady state. True False

False

The world as a whole is more efficient under free trade than under free migration. True False

False

We cannot tell whether the production function Y = KaL1-a has constant returns to scale, because we do not know the value of a. True False

False

Workers in Europe work fewer hours than in the United States, and thus per capita GDP is lower in Europe. Because per capita income is lower in Europe, Europeans are clearly worse off in terms of welfare than Americans. True False

False

f the marginal product of capital is less than the rental rate of capital, the firm should rent more capital. Answers: True False

False

The trade balance is $1,000 and investment is $5,000. Domestic saving is equal to Answers: a. $6,000. b. $4,000. c. -$2,000. d. -$1,000.

Selected Answer: Correcta. $6,000.

A construction company produces a $200,000 house using $50,000 worth of wood and steel in addition to $50,000 of labor hours. The value added by the construction company is Answers: a. $50,000. b. $150,000. c. $100,000. d. $200,000.

150,000

Consider a simple economy producing 2 goods: coffee and TVs. In 2014 the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on this information the percentage change in real GDP in chained prices benchmarked to 2015 is: Answers: a. -16.5% b. -22.0% c. 22% d. 16.5%

-16.5%

Under national income accounting, GDP equals Selected Answer: Answers: a. the goods produced in the economy. b. the income earned in the economy. c. the total purchases in the economy. d. All of these choices are correct.

Correctd. All of these choices are correct.

This year a real estate agent helped you buy a house for $200,000 which was originally built in 1985. The agent's commission was $12,000. How will this transaction affect this year's GDP? Selected Answer: Answers: a. Investment expenditures will increase by $212,000. b. Consumption expenditures will increase by $212,000. c. Investment expenditures will increase by $12,000. d. Consumption expenditures will increase by $12,000.

Correctd. Consumption expenditures will increase by $12,000.

In the production model, which of the following is an unknown variable? Answers: a. The productivity parameter b. The supply of capital c. The supply of labor d. The amount of capital

Correctd. The amount of capital

A country has a total civilian population (over age 16) of 300 million. Of this population, 225 million are employed, 25 million are unemployed, and the remainder of the population is not in the labor force. Then, the unemployment rate is Answers: a. .100. b. .150. c. .083. d. .111.

Selected Answer: Correcta. .100.

Suppose the Federal Reserve decreases interest rates from 4% to 3%, which leads to an increase in short-run output of 1.5%. If there are no other shocks to the economy, and the resulting change in inflation is +0.375%, what is the value of the parameter mc011-1.jpg? Answers: a. 0.25 b. 0.66 c. 1.5 d. 4

Selected Answer: Correcta. 0.25

n a production model where the production function is mc010-1.jpg the equilibrium wage rate is equal to mc010-2.jpg, labor supply is 27 workers and the productivity parameter is equal to 1. What is the equilibrium level of capital? Answers: a. 125 b. 25 c. 625 d. 5

Selected Answer: Correcta. 125

Under autarky a country produces three goods: oranges, books, and calculators. The price of oranges is $1. If the wage is equal to $6 and each worker spends 1/3 of her income on each of the three goods, what is the consumption of oranges per person? Answers: a. 2 b. 1 c. 3 d. 4

Selected Answer: Correcta. 2

Consider an economy characterized by the production function mc013-1.jpg where the productivity parameter is equal to 1.2. How many units of output can be produced with 25 units of capital and 64 workers? Answers: a. 48 b. 10 c. 24 d. 1,600

Selected Answer: Correcta. 48

France and Japan have the same-sized labor force. Suppose French workers can produce 2 cars per year, and Japanese workers can produce 10 cars per year. Suppose French workers can produce 1 sailboat per year, and Japanese workers can produce 2 sailboats per year. Which of the following is true? Answers: a. France has a comparative advantage in producing sailboats. b. France has neither a comparative or absolute advantage at producing either. c. France has an absolute advantage in producing both goods. d. France has a comparative advantage in producing cars.

Selected Answer: Correcta. France has a comparative advantage in producing sailboats.

Suppose the rest of the world becomes worried that the United States cannot pay back its foreign debt. Which of the following may happen? Answers: a. Interest rates may increase. b. Net exports may decrease. c. Investment and consumption may increase. d. Interest rates may decrease.

Selected Answer: Correcta. Interest rates may increase.

According to the principle of transition dynamics, which economy will grow fastest? Answers: a. The same country 1 year after the natural disaster destroyed most of the capital stock b. A rich country in steady state c. A poor country in steady state d. A country 10 years after a natural disaster destroyed most of the capital stock

Selected Answer: Correcta. The same country 1 year after the natural disaster destroyed most of the capital stock

There is a shock that shifts labor supply or labor demand to the left. Then, in theory, the unemployment rate in the long run will Answers: a. be unchanged from the level prior to the shock. b. be higher. c. be lower. d. depend on whether labor supply or labor demand is shocked.

Selected Answer: Correcta. be unchanged from the level prior to the shock.

The country of Cerfenia has pegged its currency to the currency of Garlandia. If the Garlandia central bank decreases interest rates in an effort to combat a recession, Cerfenia has to_______ if it wants to maintain the exchange rate fixed. Answers: a. decrease interest rates by the same amount b. decrease interest rates less c. increase interest rates by the same amount d. increase interest rates more

Selected Answer: Correcta. decrease interest rates by the same amount

If the price level in year 1 was equal to 100 and the price level in year 2 was equal to 1,000, in year 2 the country is experiencing: Answers: a. hyperinflation b. deflation c. stable prices d. inflation

Selected Answer: Correcta. hyperinflation

Suppose the United States is currently at its trend level of potential output. All economies are open. Europe enters into a recession. Short-run output in the United States will be Answers: a. negative. b. positive. c. unchanged because European fluctuations do not impact the United States. d. uncertain.

Selected Answer: Correcta. negative.

In the short run, unanticipated movements in the nominal exchange rate result in movements in the real exchange rate mainly because of the assumption of Answers: a. sticky inflation. b. the quantity theory of money. c. the law of one price. d. the policy trilemma.

Selected Answer: Correcta. sticky inflation.

An economy starts at its long-run values. A recession will then cause Answers: a. the inflation rate to decrease, because firms seek to sell more. b. the inflation rate to decrease, because firms seek to sell less. c. the inflation rate to increase, because firms seek to sell less. d. the inflation rate to increase, because firms seek to sell more.

Selected Answer: Correcta. the inflation rate to decrease, because firms seek to sell more.

The unemployment rate in Europe has been higher than that in the U.S. during the last two decades because: Answers: a. of the productivity decline in the European economies and high oil prices in the 1970s b. of the combined effect of the inefficient unemployment insurance system and the productivity slowdown/high oil prices in the 1970s c. the European system of unemployment insurance is inefficiently designed d. Europeans are not willing to work as much

Selected Answer: Correctb. of the combined effect of the inefficient unemployment insurance system and the productivity slowdown/high oil prices in the 1970s

In 1994 your parents made an investment of $4,000. By 2015 the investment grew to $32,000. Assuming a constant rate of growth, what was the average annual growth rate of this investment? Answers: a. 7% b. 10% c. 70% d. 100%

Selected Answer: Correctb. 10%

Last year you invested $100 in a savings account earning interest of 9% per year. If over the past year the overall price level in the economy decreased by 2%, what was the real interest rate during this period? Answers: a. 2% b. 11% c. 9% d. 7%

Selected Answer: Correctb. 11%

Assume the law of one price holds. The exchange rate is 1.2 euros per 1 dollar. A French student, Emmanuelle, can purchase one year of college tuition for $24,000 in the United States. How much will the tuition cost Emmanuelle in euros? Answers: a. 20,000 euros b. 28,800 euros c. 24,000 euros d. 18,400 euros

Selected Answer: Correctb. 28,800 euros

Which of the following is a cost of economic growth? Answers: a. Global warming b. All of these choices are correct. c. Increased income inequality d. Job loss in certain sectors

Selected Answer: Correctb. All of these choices are correct.

If a country is running a trade deficit, which of the following is true? Answers: a. Investment and domestic savings are equal. b. Investment is greater than domestic savings. c. Exports are greater than imports. d. Domestic savings is greater than investment.

Selected Answer: Correctb. Investment is greater than domestic savings.

If the marginal product of capital decreases, what happens to the IS curve? Answers: a. It shifts to the right. b. It shifts to the left. c. There is movement along the curve. d. It remains the same.

Selected Answer: Correctb. It shifts to the left.

The quantity theory of money says that a doubling of the growth rate in the money supply will, in the long run, lead to Answers: a. a decrease of inflation. b. a doubling of inflation. c. a doubling of real GDP growth. d. a doubling of the price level.

Selected Answer: Correctb. a doubling of inflation.

Under free trade, ( ___ ) advantage is the reason for positive gains to both economies, whereas under free migration, ( ___ ) advantage is the reason for positive gains. Answers: a. absolute; comparative b. comparative; absolute c. absolute; absolute d. comparative; comparative

Selected Answer: Correctb. comparative; absolute

The marginal product of capital can differ from the real interest rate because: Answers: a. the MPK is exogenous while the real interest rate is endogenous. b. installing new capital takes time to equalize the MPK and the real interest rate. c. the MPK depends on how sensitive firms are to changes in the economy. d. the MPK and the real interest rate are always equal to each other.

Selected Answer: Correctb. installing new capital takes time to equalize the MPK and the real interest rate.

If net investment is negative: Answers: a. the economy is below its steady state and growth of output is negative. b. the economy is above its steady state and growth of output is negative. c. the economy is above its steady state and growth of output is positive. d. the economy is below its steady state and growth of output is positive.

Selected Answer: Correctb. the economy is above its steady state and growth of output is negative.

Starting from steady state, a permanent increase in the rate of depreciation in the Solow model causes Answers: a. the growth rate of output to fall temporarily but leaves the level of GDP unchanged in the long run. b. the growth rate of output to fall temporarily and the level of GDP to fall permanently. c. the growth rate of output to rise temporarily and the level of GDP to rise permanently. d. the growth rate of output to rise temporarily but leaves the level of GDP unchanged in the long run.

Selected Answer: Correctb. the growth rate of output to fall temporarily and the level of GDP to fall permanently.

An economy starts in steady state. A war causes a massive destruction of the capital stock. This shock will cause Answers: a. the growth rate of output to rise initially as the economy begins to converge to a new lower steady state. b. the economy to enter a period of negative growth. c. the growth rate of output to rise initially as the economy begins to converge to the old steady state. d. the economy to converge to a new lower steady state.

Selected Answer: Correctc. the growth rate of output to rise initially as the economy begins to converge to the old steady state.

Suppose that nominal GDP is $5,000 and the velocity of money is equal to 5. According to the quantity theory of money, what is the amount of money in circulation? Answers: a. $100 b. $500 c. $1,000 d. $5,000

Selected Answer: Correctc. $1,000

Suppose that the nominal exchange rate between the dollar and the Norwegian kroner is 5 dollars/kroner. If the price of a bundle of goods is $100 in the United States and the same bundle is 200 kroner in Norway, what is the real exchange rate between the United States and Norway? Answers: a. 10 Norwegian goods per U.S. good. b. 0.10 U.S. goods per Norwegian good. c. 0.10 Norwegian goods per U.S. good. d. 2.5 U.S. goods per Norwegian good.

Selected Answer: Correctc. 0.10 Norwegian goods per U.S. good.

Country A can produce 300 lbs. of oranges or 100 computers, while country B can produce 100 lbs. of oranges or 50 computers. If each country specializes in the good for which it has comparative advantage and the two countries engage in free trade, their combined consumption of oranges and computers will be equal to: Answers: a. 100 lbs. oranges and 100 computers b. 150 lbs. oranges and 25 computers c. 300 lbs. oranges and 50 computers d. 200 lbs. oranges and 25 computers

Selected Answer: Correctc. 300 lbs. oranges and 50 computers

Suppose oil prices increase. Which of the following is true? Answers: a. Equilibrium wages are lower. b. Employment is lower. c. Both of these choices are correct. d. None of these choices are correct.

Selected Answer: Correctc. Both of these choices are correct.

Which of the following is NOT an example of capital? Answers: a. An automobile factory building b. A plant manager's computer c. Screws and bolts used for making cars at an automobile factory d. Machines at an automobile factory

Selected Answer: Correctc. Screws and bolts used for making cars at an automobile factory

Which of the following is both an advantage and a disadvantage of countries in Europe adopting a single currency? Answers: a. Risks associated with fluctuations with the exchange rate are unlimited. b. Transaction costs to trade between member countries are increased. c. The countries have a single central bank and monetary policy. d. The countries have individual central banks and monetary policy.

Selected Answer: Correctc. The countries have a single central bank and monetary policy.

Which of the following is included in TFP? Answers: a. The amount of labor b. The amount of capital c. The quality of labor d. All of these choices are correct.

Selected Answer: Correctc. The quality of labor

Which of the following questions does the Solow model NOT help to explain? Answers: a. Why are some countries richer than other countries? b. Will a country be richer if the investment rate is higher than another country, all else being equal? c. Why do countries sustain growth in the long run? d. Why do countries have different growth rates in the same time periods?

Selected Answer: Correctc. Why do countries sustain growth in the long run?

Price-setting behaviors become more sensitive to demand conditions. This results in Answers: a. a larger recession occurring to change the inflation rate by a given amount. b. the IS curve becoming flatter. c. a smaller recession occurring to change the inflation rate by a given amount. d. the IS curve becoming steeper.

Selected Answer: Correctc. a smaller recession occurring to change the inflation rate by a given amount.

The short-run model determines Answers: a. potential output and current output. b. current output and long-run inflation. c. current output and current inflation. d. potential output and current inflation.

Selected Answer: Correctc. current output and current inflation.

Suppose prices adjust immediately because there is no sticky inflation. Then, monetary policy will Answers: a. have no effect. b. have both real and nominal effects. c. have only nominal effects. d. have only real effects.

Selected Answer: Correctc. have only nominal effects.

The level of consumption: Answers: a. is largest when the economy is in its steady state. b. is largest when the economy is below its steady state. c. is largest when the economy is above its steady state. d. directly depends on the depreciation rate.

Selected Answer: Correctc. is largest when the economy is above its steady state.

According to the policy trilemma, a country that adopts a currency board will have to give up on having Answers: a. free financial flows. b. The country will give up nothing. c. monetary policy autonomy. d. a stable exchange rate.

Selected Answer: Correctc. monetary policy autonomy.

If the aggregate demand parameter increases and the central bank wishes to stabilize output at potential, it should Answers: a. buy government bonds. b. expand the money supply. c. raise the nominal interest rate. d. lower the nominal interest rate. Response

Selected Answer: Correctc. raise the nominal interest rate.

An economy adopts a policy of capital controls. The economy can maintain a stable exchange rate and monetary policy autonomy by Answers: a. encouraging hedge funds to speculate in its currency. b. holding foreign exchange reserves. c. rationing instead of trading its currency. d. running a balanced budget.

Selected Answer: Correctc. rationing instead of trading its currency.

Suppose that last year the investment parameter āi was equal to .12 but this year it fell to .1. This change can be explained by: Answers: a. a decrease in the marginal product of capital. b. a decrease in the real interest rate. c. firms being optimistic about the future and willing to invest more at any level of the interest rate. d. firms being pessimistic about the future and willing to invest less at any level of the interest rate.

Selected Answer: Correctd. firms being pessimistic about the future and willing to invest less at any level of the interest rate.

Suppose the government decides to spend $500 million on infrastructure improvement projects. Part of the financing will be from additional borrowing in the amount of $200 million. An increase in taxes will bring an extra $200 million. If the government decides to print new money to finance the rest, how much will the seignorage be? Answers: a. $ 500 million b. $ 200 million c. $ 50 million d. $ 100 million

Selected Answer: Correctd. $ 100 million

After graduating college, you start a job making $40,000. Your earnings grow at a constant growth rate of 3 percent per year. When you retire 40 years later, you are earning approximately: Answers: a. 70,000. b. 41,000. c. 100,000. d. 130,000.

Selected Answer: Correctd. 130,000.

If 21% of unemployed find jobs and 0.9% of the employed lose their jobs, the natural rate of unemployment will be: Answers: a. 3.5% b. 4.8% c. 3.1% d. 4.1%

Selected Answer: Correctd. 4.1%

Which of the following people benefits from a surprise increase in inflation? Answers: a. A person receiving a fixed pension b. A person with a variable rate mortgage c. A lender of large amounts of money who is repaid on a fixed schedule d. A person who borrowed large amounts of money on a fixed payment schedule

Selected Answer: Correctd. A person who borrowed large amounts of money on a fixed payment schedule

Which of the following is an example of cyclical unemployment? Answers: a. A worker quits her job to find a better job. b. A worker loses her job because the minimum wage increases substantially. c. A worker is unemployed because the cost of finding a job in another city is too high. d. A worker loses her job because the economy begins to enter a recession.

Selected Answer: Correctd. A worker loses her job because the economy begins to enter a recession.

What is an explanation for why an economy eventually settles in steady state? Answers: a. The production function exhibits diminishing returns to capital. b. The capital stock depreciates at a constant rate. c. Eventually, investment generated is equal to the amount of capital depreciated. d. All of these choices are correct.

Selected Answer: Correctd. All of these choices are correct.

Which of the following explains why an increase in the interest rate reduces short-run output? Answers: a. The cost of borrowing increases for firms. b. The cost of borrowing increases for households. c. Firms reduce business investment. d. All of these choices are correct.

Selected Answer: Correctd. All of these choices are correct.

Why does the classical dichotomy fail to hold in the short run? Answers: a. Firms have perfect information. b. Unions negotiate contracts that set wages for short periods of time. c. Prices adjust immediately to all shocks. d. It is costly and time-consuming to change prices on a daily basis.

Selected Answer: Correctd. It is costly and time-consuming to change prices on a daily basis.

According to the bathtub model of unemployment, which of the following statements is true if a law permanently increases only the job finding rate? Answers: a. The natural rate of unemployment will rise. b. The unemployment rate will fall, but the natural rate of unemployment will be unchanged. c. The unemployment rate will rise, but the natural rate of unemployment will be unchanged. d. The natural rate of unemployment will fall.

Selected Answer: Correctd. The natural rate of unemployment will fall.

A production function has inputs X, Y, and Z and a productivity parameter mc001-1.jpg. The production function mc001-2.jpg exhibits Answers: a. increasing returns to scale. b. diminishing returns to scale. c. decreasing returns to scale. d. constant returns to scale.

Selected Answer: Correctd. constant returns to scale.

In our model, a hurricane that damages some physical capital in an economy will typically Answers: a. increase short-run output and potential output. b. decrease short-run output and potential output. c. decrease short-run output and increase potential output. d. increase short-run output and decrease potential output

Selected Answer: Correctd. increase short-run output and decrease potential output.

Suppose a negative aggregate demand shock causes short-run output to drop to -1%. To stimulate investment and bring the economy back to potential output the interest rate decreases by 1 percentage point. However, as a result investment increases more than expected and short-run output reaches 1%. This result could be caused by: Answers: a. An increase in the consumption share of potential output b. An increase in the government purchases share of potential output c. A decrease in the import share of potential output d. The presence of a consumption multiplier e. All of these are correct

Selected Answer: Correcte. All of these are correct

Which of the following is the main reason for free trade? Answers: a. risk sharing against economic shocks b. desire to run large trade deficits c. people value goods that other people produce less at the margin than they value what they themselves own d. decreased welfare gains

Selected Answer: Incorrectc. people value goods that other people produce less at the margin than they value what they themselves own

A tight monetary policy by the European Central Bank will result in an increase in the nominal interest rate. True False

True

An implication of adaptive expectations and sticky inflation is that the Federal Reserve must push output below potential to lower inflation. True False

True

If a tax is imposed on labor supply and wages are rigid, wages and the labor participation rate will be lower than the market clearing level after the shock. True False

True

If an economy has actual output equal to potential output, then the aggregate demand shock equals zero. True False

True

In order to maintain political support for free trade, it is likely that policymakers will need to find ways to share the benefits of trade with the individuals who are most directly harmed. True False

True

In the Solow diagram, an increase in the investment (saving's) rate will cause a decrease in consumption for all levels of capital. True False

True

Short-run output is measured as a percentage. True False

True

Suppose that a shock to the economy increases the bargaining power of labor unions. The Phillips curve will shift upward. True False

True

The labor demand curve slopes downward because the marginal product of labor is diminishing as we add additional labor. True False

True