ECON 100C

Which of the following is false about the Great Recession?

The increases in demand from the global saving glut contributed to declining asset markets in the United States.

One way the Federal Reserve stimulates investment during economic recessions is to increase the real interest rate.

False

Suppose that nominal GDP is $7,000 and the velocity of money is equal to 5. According to the quantity theory of money, what is the amount of money in circulation?

$1,400

Suppose an economy has the following demand function for real money balances: (M/P)d = L(i,Y) = (0.2Y)/(i0.5) Given that the velocity of money is 10, output (Y) is 1500, and money supply is $2000, the price level is:

$13.33

Assume you save 25% of each additional dollar of income. Congress decides to increase government spending by $100. How much will each additional dollar of government spending increase output (Y)?

$4

In the Solow Growth Model, assume that (s) is the savings rate for capital K, where s=0.23 and (d) is the depreciation rate, where d=0.06. The population growth rate is (n), where n = 0.11. The technological growth rate is g. We know our economy is currently in the golden-rule steady state for consumption. The production function is Y=AK2/3L1/3. Assume current capital per worker 4. Find the technological growth rate (g) in this current steady-state equilibrium (round to two decimals).

0.25

(continued from previous question) Assume that the production function in an economy is given by y=k1/2, where y and k are the per-worker levels of output and capital, respectively. The savings rate is given by s=0.2 and the rate of depreciation is 0.05. What is the optimal savings rate to achieve the golden-rule steady state level of k?

0.5

Consider a Solow economy described by the production function: Y = K0.5 L0.5, with a savings rate of 10% and a depreciation rate of 5%. Assuming no population growth or technological progress, find the steady-state consumption per worker.

1.8

Consider a Solow economy described by a Cobb-Douglas production function with a capital share of output of 40%, a savings rate of 20%, and a depreciation rate of 10%. What is the golden-rule level of capital per worker?

10.08

Consider an economy with the following production function: y = k0.7 Where y and k are the per-worker level of output and capital, respectively. Assume that there is no population growth nor technological progress, and the depreciation rate is 5%. Find the steady-state capital per worker (k*) if the saving rate is 10% and 20% respectively.

10.08; 101.59

(continued from previous question) Assume that the production function in an economy is given by y=k1/2, where y and k are the per-worker levels of output and capital, respectively. The savings rate is given by s=0.2 and the rate of depreciation is 0.05. What is the golden-rule level of k?

100

Suppose an economy has a Cobb-Douglas production function with a capital share of output of 20%. The current savings rate is 45%, depreciation is 2.5%, population growth is 1.5%, and technological growth is 2%. What is the steady-state capital per worker (rounded to one decimal)? The savings rate must (increase/decrease) to reach the golden rule steady-state.

12.4; decrease

Which of the following is not an example of frictional unemployment?

Higher minimum wages laws cause employers to fire many low-skilled workers.

In 2017, the rate of job separations was 0.015 and the rate of job findings was 0.185. In 2018 the rates are 0.07 and 0.28, respectively. According to the natural rate of unemployment, what is the percent change in the unemployment rate between 2017 and 2018? (round to the nearest integer if necessary)

167%

Suppose in a small economy, the real output is 30,000 units and the price per unit is $4. The interest rate is 5% and inflation rate is 2%, while the money supply is $60,000. Under the Quantity Theory of Money, what is the velocity?

2

Suppose that nominal GDP is $10,000 and the velocity of money is equal to 4. According to the quantity theory of money, what is the amount of money in circulation?

2,500

Assume the production function in an economy is given by y=k0.5, where y and k are the per-worker levels of output and capital, respectively. The rate of depreciation is 25%. Assume no technological progress or population change. What is the golden rule capital per worker?

4

Suppose the separation rate for labor in an economy with 20,000 individuals in the labor force is 0.2 and the rate of job finding is 0.8. In equilibrium, the number of unemployed individuals is 4000 and the unemployment rate is 0.2 .

4,000; 0.2

Suppose that real money demand is given by the function(𝑀𝑃)𝑑=𝑌4𝑖 (MP)d=Y4i and that real money supply is given by the function 𝑀𝑃 MP, where Y is real GDP, i is the nominal interest rate, and P is the overall price level. Using the quantity theory of money, what is the velocity of money in this economy?

4i

(continued from previous question) Assume that the production function in an economy is given by y=k1/2, where y and k are the per-worker levels of output and capital, respectively. The savings rate is given by s=0.2 and the rate of depreciation is 0.05. What is the optimal level of consumption per-worker, c, achievable in the golden-rule steady-state?

5

Consider a Solow economy described by the per-worker production function y= k0.5, and a depreciation rate of 1%. Find the optimal savings rate (s) to achieve the golden-rule level of capital per worker.

50%

Suppose labor demand is given by the equation w=50-q and labor supply is given by the equation w=20+2q, where w is real wage and q is labor. Strong unions fight for a $44 real wage and let's assume there are no discouraged workers. Compared to the free-market competitive equilibrium, what is the resulting unemployment rate? (round to nearest integer if necessary)

50%

Due to better internet job searching websites, the job finding rate increases in the recent years. In a survey studying the job finding rate in Jan 2019, 420 out of 10,000 unemployed workers report that they found jobs. In the same period of time, a similar survey studying employment status reports that 29 out of 10,000 employed workers left their jobs. What is the steady unemployment rate?

6.46%

Suppose the nominal interest rate is 6%. What does the inflation rate need to be for the real interest rate to be negative?

7%

In the current pandemic world, jobs opportunities come and go quickly. In your dorm a survey was distributed inquiring about student employment status. The survey found that among the employed students, 15 percent lose their job every month. Among unemployed students, on average, 5 percent find a new job every month. What is the steady-state level of unemployment?

75%

Suppose labor demand is given by the equation w=100-3q and labor supply is given by the equation w=20+q, where w is real wage and q is labor. Strong unions fight for a $46 real wage and let's assume there are no discouraged workers. Compared to the free-market competitive equilibrium, what is the resulting number of unemployed workers? (round to nearest integer if necessary) Correct!

8

Which of the following explains the enormous increase in housing prices during the early 2000s?

A substantial deterioration in lending standards

In the AD-AS model, an increase in aggregate demand will lead to:

An increase in output in the short run and an increase in price in the long run

In the long run in the AD-AS model, an increase in aggregate demand would lead to:

An increase in price but no net change in output

One major cost of unexpected inflation is:

Arbitrary redistribution of wealth

Which of the following is true about the 2008 Financial crisis and the COVID-19 crisis?

Both crisis had spillover effects

Which of the following is not correct about stabilization policy after a shock to the aggregate supply?

Both prices and output return to the original level

Which of the following is not a similarity between the 2008 Financial crisis and the COVID-19 crisis?

Caused by shock to integrated supply chains

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.

Which of the following components of GDP fell dramatically in the Great Recession but is traditionally stable in a recession?

Consumption

If Congressional legislation makes it more difficult to fire employees but does not impact the rate of employee hiring, how would the natural rate of unemployment change?

Decrease

Which of the following is not a factor that contributed to the Great Recession?

Decrease of foreign investment in U.S. markets

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

False

Increasing unemployment insurance benefits will increase structural unemployment.

False

In the AD-AS model, the difference between the short run and the long run in equilibrium is that:

In the long run, changes in aggregate demand affect the price level but not output

What happens when there is an exogenous increase in the velocity of money?

In the long run, prices rise and the economy moves up its demand curve back toward full employment

Due to wage rigidity, the unemployed population will ________ when labor supply increases.

Increase

Which of the following is not a policy that increases the savings rate?

Increase corporate income tax

The total money supply in the economy rises from $12M to $17M (in millions of dollars). The velocity of money transactions is 2.4. The price level is 1.9. With more money in the economy, people spend money 3.6% faster than before. To maintain the economy at a stable state and maintain the same level of output (Y), a central planner must take what action? (round all results to two decimals)

Increase the price level by 46.84%

What policies below do not help increase the job finding rate (f)?

Increasing the duration of unemployment insurance benefits

Bailouts of large financial companies were required during the Great Recession for all the below reasons except

It incentivizes financial companies to reduce loans to risky individuals.

Suppose the economy is in steady state. The steady state level of capital is currently below the golden rule level of capital, so policy makers take action to ensure the economy will transition to the golden rule steady state. What will happen to output, consumption, and investment in the transition to the new steady state?

Output will gradually increase to a higher steady state level. Consumption will initially decrease and then gradually increase to a higher steady state level. Investment will increase to a higher steady state level.

What is the key assumption in the AD-AS model that makes the short-run aggregate supply curve horizontal, while the long-run aggregate supply curve is not horizontal?

Prices are sticky in the short-run and flexible in the long-run

Which of the following is not one of the governmental responses to the Great Recession?

Purchasing mortgaged-backed securities and forgiving defaulted home loan repayment.

Starting in a long-run equilibrium, suppose the Federal Reserve decreases the money supply to combat high inflation. Note: SR=short run, LR=long run, P=price level, r = real interest rate, Y = GDP

SR impact on r: INCREASES, P: no impact; LR impact on r: returns to original level, impact on P: decreases

Starting in a long-run equilibrium, assume that G increases and T decreases. Which of the following is true? Note: SR=short run, LR=long run, P=price level, r = real interest rate, Y = GDP

SR: Y increases, LR: P increases, r increases

The oil shock in the 1970s led to a shift in the_________. In the short run this led to a(n) _________. in prices, ________ in output, and a(n)__________ in employment.

Short run aggregate supply curve; increase; decrease; decrease

In the Solow Growth Model, assume that (s) is the saving rate for capital K, where 0<s<1 and (d) is the depreciation rate, where 0<d<1. The population currently grows at a 30% rate and is in a steady-state equilibrium, with a production function of Y = AK1/3L2/3. Assuming the population growth rate (n) changes to 50%, which below statement is true about the steady-state levels of capital per worker (k) and output per worker (y)?

The change in n results in a decrease of k*, thus y* also decreases.

Suppose an economy has the following demand function for real money balances: (M/P)d = L(i,Y) = Y/(8i) If the output (Y) in the economy grows at rate m and the nominal interest rate (i) remains constant, at what rate will the demand for real balances grow?

The demand for real money balances will grow at the rate m

If at the current steady-state we find that (n+g+δ) < MPK, which of the following is true?

The economy is below the Golden Rule steady state and should increase s.

The nominal interest rate is 6%. Expected inflation is 2%. Actual inflation is 1%. Calculate the ex-ante and ex-post real interest rates. Who benefits from lower actual inflation?

The ex-ante real interest rate is 4%. The ex-post real interest is 5%. Lenders benefit from lower actual inflation.

Newly released data shows that the U.S. unemployment rate was 6.2% in Feb 2021, whereas the Euro area unemployment rate was 8.3%. In fact, the U.S. has almost always (with a few exceptions) had a lower unemployment rate compared to the Euro area. Which is most likely not a reason to explain the above scenario?

U.S. has relatively stronger unions compared to the Euro area, which decreases the unemployment rate

Which of the following is not a determinant of the demand for real money balances:

Velocity

If the IS curve is given by Y=1,700-100r and the LM curve is given by Y=500+100r, then equilibrium income and interest rate are given by:

Y=1100, r=6%

Which of the following factors differentiated the Great Recession from previous recessions since 1950?

a decrease in World GDP

Unexpected inflation has predictable consequences. Which of the individuals benefit from an increase in inflation?

a doughnut shop who pays back a building mortgage on a fixed payment schedule

In the aggregate demand-aggregate supply model, if prices increase and output decreases in the transition from the short to long run, then currently equilibrium output is _______ the natural rate of output.

above

A favorable supply shock occurs when:

an oil cartel breaks up and oil prices fall.

Consider a Solow economy currently in equilibrium. Suppose that a change in the tax code increases the savings rate, s. In the steady-state equilibrium, this economy will experience a _______ output per worker, a _______ capital per worker, and a(n) ________ consumption per worker.

higher; higher; indeterminate change

Countries are likely to experience hyperinflation when

central banks finance large government budget deficits

Suppose that k*=5 and k*GR=25. Starting at k*, if we increase the savings rate to achieve k*GR then

consumption will decrease then increase

A positive supply shock would

decrease prices in the short run and return to the original price level in the long run

Assume we are currently in a golden-rule steady-state, then the technological progress rate, (g), doubles. How should we change the savings rate (s) to achieve the new golden-rule capital level?

decrease s

According to the quantity theory of money, if output is higher, ______ real balances are required when velocity is constant, and for fixed M (money supply) this means ______ prices.

higher; lower

If 𝑀𝑃𝐾<(𝛿+𝑛), which of the following is true?

decrease the savings rate to reduce k to the golden-rule level

Suppose there's an exogenous decrease in the velocity of money in the AD-AS model. Such a shock would lead to a(n) _________. in aggregate demand . If the government aims to keep the price level stable, the government should _________.

decrease; demand

A new environmental law requires firms to reduce their emissions of pollutants in the air by installing special filters in the factories. In the short-run, such a legislation would lead to a(n) ___________ in the short-run aggregate supply curve causing prices to _____ and output to _______ . In order to stabilize output back to the initial level, the Fed reacts by _______ aggregate demand. However, a drawback of such a policy is that it leads to a permanent_______ price level.

decrease; increase; decrease; increasing; higher

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by:

decreasing the money supply.

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

downward and to the left

In the mid-1980s, oil prices ______, inflation was ______, and the unemployment rate ______.

fell; low; declined

Countries experience hyperinflation when they

finances governmental spending through seigniorage

Most economists believe that prices are:

flexible in the long run but many are sticky in the short run.

Employed Europeans tend to work fewer hours than Americans. Which of the below hypotheses have not been identified as a reason for these differences?

generous European unemployment insurance reduces the incentive to work

Which of the following statements are true in the AD-AS model?

i) When output is above its natural level, prices increase over time iii) The aggregate demand curve is downward sloping because a fall in real money balances causes a decrease in the quantity demanded for goods and services

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must _____ money supply.

increase

Starting at a long-run equilibrium, if the AD curve shifts to the right, what happens to prices in the long run?

increase

In the AD-AS long-run model, suppose that the velocity of money decreases because of a massive hurricane. How would the Central Bank use the money supply (M) to quickly return to the original level of output?

increase M to increase Y back to original levels

An economy starts in a long-run equilibrium, but then a severe drought kills crops and dramatically increases the price of food. If the Federal Reserve wanted to stabilize the economy and return it back to full employment, it would

increase the money supply, but prices would forever be higher

(continued from previous question) Assume that the production function in an economy is given by y=k1/2, where y and k are the per-worker levels of output and capital, respectively. The savings rate is given by s=0.2 and the rate of depreciation is 0.05. The savings rate must be ____________ to achieve the golden-rule level of k*.

increased

According to the quantity theory of money, if the money supply growth rate doubles, in the long run

inflation doubles

Suppose the real interest rate (r) is 3%, money growth is 7%, and real GDP growth is 4%. Loans are issued at the current nominal interest rate (i). If inflation increases by 2 percentage points, which of the following is true?

initial i = 6%; inflation change benefits borrowers who pay back loans at lower real interest rates

Assume that the production function in an economy is given by y=k1/2, where y and k are the per-worker levels of output and capital, respectively. The savings rate is given by s=0.2 and the rate of depreciation is 0.05. According to the above information, what are the steady-state levels of k, y, and c (consumption)?

k = 16, y = 4, c = 3.2

The production function for country A is as follows: Y = K0.5L0.5 Assume that there is no population growth nor technological progress, and that 5% of capital depreciates each year. Country A saves 20% of output each year. Find the steady-state level of capital per worker (k), income per worker (y), and consumption per worker (c) for this country.

k = 16, y = 4, c = 3.2

Assume we're currently in a steady-state, then the population growth rate doubles. Which of the following is true about k* and y*?

k decreases, y decreases

Suppose an economy has a Cobb-Douglas production function with a capital share of output of 50%. The current savings rate is 20%, depreciation is 2.5%, population growth is 1%, and technological growth is 1.5%. What is the steady-state capital per worker? What is the golden-state capital (k_GR)?

k*=16, k_GR = 100

Which of the below options do not increase frictional unemployment?

low-level unskilled jobs often have the same skill requirements, making it difficult for applicants to choose

Suppose current money growth is 6% and real GDP is growing at 2%. Real GDP then increases by 1 percentage point. Which of the below is true? Correct Answer

new inflation has decreased; decrease money growth by 1 percentage point to maintain previous inflation rates

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then:

output and employment will increase in the short run.

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run.

output; prices

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

prices but not level of output.

If citizens decide to hold more cash with growing distrust in banks, how does this impact interest rates (r) and output (Y) in the IS-LM model?

r increases; Y decreases

Yi took a fixed interest loan and started a beer brewing company in 2013. Suppose the money supply growth rate tripled for the past few years. According to the quantity theory of money, as a borrower Yi

saves money

Expansionary monetary policy

shifts the AD curve to the right

Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value. Which below "costs of inflation" is she experiencing?

shoeleather costs

A decrease in the real money supply, all else equal, will shift the LM curve

upward and to the left