ECON 3080: Final Review

The money hypothesis suggests that the Great Depression was caused by a:

Leftward shift in LM curve

The characteristic of the classical model that the money supply does not affect real variables is called:

monetary neutrality.

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:

more in Lowland

A liquidity trap refers to a:

point at which conventional monetary policy cannot be pursued because nominal interest rates have a lower bound of 0 percent.

A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______.

prices; output

The intersection of the IS and LM curves determines the values of:

r and Y, given G, T, M, and P

In order to derive the IS curve, all of the following are assumed to be constant EXCEPT:

real interest rates

If purchasing-power parity holds, then changes in domestic saving will _____ the real exchange rate.

Not change

Federal funds are loans from:

One bank to another

Stagflation---lower output and higher prices---is caused by

an adverse shock to aggregate supply

If a technological advancement increases productivity, the neoclassical theory of distribution predicts that:

both the real wage and the real rental price of capital will rise.

Inflation targeting is a monetary policy rule that requires the central bank to adjust _____ in order to attain the desired inflation rate.

the money supply

According to the Kremerian model, large populations improve living standards because:

there are more people who can make discoveries and contribute to innovation.

The quantity theory of money assumes that:

velocity is constant.

The Cobb-Douglas production function Y = K1/2 L1/2 can be rearranged into the output per worker function:

y = k1/2.

According to the Keynesian cross model, the formula used to calculate the government-purchases multiplier is:

ΔY / ΔG = 1 / (1 − MPC).

The steady-state level of capital occurs when the change in the capital stock per worker (Δk) equals:

0

If y = k1/2, the country saves 10 percent of its output each year, and the steady-state level of capital per worker is 4, then the steady-state levels of output per worker and consumption per worker are:

2 and 1.8, respectively.

If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal:

20,000.

Which of the following changes would contribute to a decline in the index of leading indicators, suggesting that a recession is more likely?

A decline in the slope of the yield curve

Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate:

and net exports will both fall.

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.

below; toward

The formula for steady-state consumption per worker (c*) as a function of output per worker and investment per worker is:

c* = f (k*) - δk*.

In the Keynesian model, the equilibrium income in the economy _____ the natural rate.

can be above, the same as, or below

Holding other factors constant, the ratio of government debt to GDP can decrease as a result of any of the following changes except:

decreases in tax revenue

An increase in the rate of population growth with no change in the saving rate:

decreases the steady-state level of capital per worker.

A difference between the economic long run and the short run is that:

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run

Public saving:

depends on the government's tax collections relative to its expenditures.

Exhibit: Capital per Worker and the Steady StateIn this graph, capital-labor ratio k2 is not the steady-state because:

depreciation is greater than gross investment.

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer:

does not change production

Economic science has provided convincing evidence in favor of the:

fact that there is no simple and compelling case for any particular view of macroeconomic policy.

Short-term unemployment is most likely to be ______ unemployment, while long-term unemployment is mostly likely to be _____ unemployment.

frictional; structural

Real GDP ______ over time, and the growth rate of real GDP ______.

grows; fluctuates

The aggregate supply curve is _____ in the short run and _____ in the long run.

horizontal; vertical

According to the classical theory of money, inflation does not make workers poorer because wages increase:

in proportion to the increase in the overall price level.

If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports ______, and net capital outflows ______.

increase; increase

Assume that the production function is Cobb-Douglas with parameter = 0.3. In the neoclassical model, if the labor force increases by 10 percent, then output:

increases by about 7 percent.

According to the theory of liquidity preference, the demand for money in the United States is determined by the:

interest rate

The _____ is the opportunity cost of holding money.

interest rate

When the economy is producing LESS than the equilibrium level, unplanned inventory:

inventory disinvestment will occur, and firms will be induced to increase production

Exhibit: Output, Consumption, and InvestmentIn this graph, when the capital stock per worker is OA, AB represents:

investment per worker, and BC represents consumption per worker.

When the economy is producing MORE than the equilibrium level, unplanned inventory:

investment will occur, and firms will be induced to decrease production

The tax multiplier _____ (in absolute value) the government-purchases multiplier.

is always smaller than

In the United States, the money supply is determined:

jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held.

If the Fed responds to an adverse supply shock by expanding the money supply, it will

keep the economy closer to its natural levels of output and employment

The LM curve is derived primarily from the:

liquidity preference theory

In The General Theory of Employment, Interest, and Money, John Maynard Keynes proposed that the Great Depression was caused by:

low aggregate demand

Two countries, Anastasia and Beersheba, have identical production functions y = f(k), but Anastasia has a higher saving rate than Beersheba. This implies that, for identical levels of capital per worker, Anastasia has:

lower consumption per worker than Beersheba.

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines.

lowers; raises

The intersection of the IS and the LM curve determines the equilibrium:

national income and interest rate

The IS-LM model determines the _____ in the economy in the _____.

national income and interest rate; short run

The concept of monetary neutrality in the classical model means that an increase in the money supply growth rate will increase:

nominal interest rates.

The Lucas critique argues that because the way people form expectations is based ______ on government policies, economists ______ predict the effect of a change in policy without taking changing expectations into account.

partly; cannot

When the economy is in a liquidity trap, the Federal Reserve can use all of the following policies to help the economy get out of a recession EXCEPT:

reducing interest rates to zero to stimulate the economy

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations

All else equal, an increase in government purchases by 100 will:

shift the IS curve to the right by 100 / (1 − MPC).

When the Federal Reserve decreases the money supply, the LM curve:

shift to the left

The IS-LM model was developed to explain the:

short-run fluctuations in the economy

According to the sticky-price model:

some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.

Each of the two models of short-run aggregate supply is based on some market imperfection. In the sticky-price model, the imperfection is that:

some firms do not adjust their prices instantly to changes in demand

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade ______ and ______ net capital outflow.

surplus; positive

The costs of unexpected inflation, but not of expected inflation, are:

the arbitrary redistribution of wealth between debtors and creditors.

If the nominal interest rate increases, then:

the demand for money decreases.

Each point on the IS curve represents equilibrium in:

the goods market

In the classical model with fixed income, if households want to save more than firms want to invest, then:

the interest rate falls.

If saving exceeds investment demand and consumption is not a function of the interest rate:

the interest rate will fall.

Policies to substantially reduce the natural rate of unemployment should be targeted at:

the long-term unemployed.

When the unemployment rate is at a steady state:

the number of people finding jobs equals the number of people losing jobs.

If money demand became less sensitive to the level of income, then the LM curve would:

Become flatter

The preferences of households determine the:

Currency-deposit ratio

If disposable income is 4,000, consumption is 3,500, government purchases is 1,000, and taxes minus transfers are 800, national saving is equal to:

300

If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to ______ multiplied by B.

(cr + 1)/ (cr + rr)

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:

4

Suppose that over the course of a year 100 people are unemployed for 4 weeks each (the short-term unemployed), while 10 people are unemployed for 52 weeks each (the long-term unemployed). Approximately what percentage of the total weeks of unemployment were attributable to the long-term unemployed?

56.5 percent

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by ____ percent.

5; 5

The growth rate of a labor force is 0.02, and in 2020, 60 million people are working. At this rate, in 2022, about _____ million people will be working.

62.4 mil

A(n) _____ will cause the LM curve to shift upward.

decrease in the money supply

Monetary policies that _____ will shift the LM curve to the left.

decrease the inflation rate

In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will:

decrease.

The Pigou effect postulates that as prices _____, consumers spend _____ money.

decrease; more

Both the investment function and the IS curve slope:

downward because higher interest rates induce less investment

The differing interpretations of the historical record of the Great Depression provide support for using:

either active or passive macroeconomic policy

Starting from a trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _____, and net exports will _____.

increase; decrease

Expansionary fiscal policy will cause gross domestic product to _____ and the interest rate to _____.

increase; increase

All else constant, a higher level of income _____ money demand, which _____ the interest rate.

increases; increases

In the classical model, the equilibrium income in the economy _____ the natural rate.

must be exactly

An increase in taxes will cause the IS curve to:

shift left

If the marginal propensity to consume is "large," then the:

IS curve is relatively flat

Suppose that the Federal Reserve tightens the money supply in order to reduce inflation. In the long run, this policy MOST likely will cause nominal interest rates to:

Decrease

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:

Decreases

As the relative demand for unskilled workers falls, wages for unskilled workers ______, and unemployment compensation becomes a ______ attractive option.

Fall; More

The IS curve is the locus of (Y, r) points where the:

Goods market is in equilibrium The IS curve is the locus of (Y, r) points where Y = C + I + G.

Suppose that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.5(Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate, in percent. Government spending (G) is 1,000, and taxes (T) is also 1,000. When a technological innovation changes the investment function to I = 3,000 - 100r:

I is unchanged and r rises by 10 percentage points.

The negative relationship between the interest rate and the level of income that gives equilibrium in the market for goods and services is called the _____ curve.

IS

The assumption of flexible prices is a more plausible assumption when applied to price changes that occur:

In the long run

Suppose that the per-worker production function y = f(k) = k0.5, that the saving rate is s = 0.2, and that the depreciation rate is δ = 0.02. If k = 49, then the capital stock per worker will:

Increase

When investment exceeds depreciation, the capital stock MOST likely will:

Increase

If a computer glitch at credit card companies makes stores start accepting only cash payments, the demand for money will ______. If the money supply is held constant, then the aggregate demand curve will shift to the _______.

Increase; left

If MPK = 0.1 in the steady state of an economy with δ = 0.1 and n = 0.05, then the steady-state level of capital per worker _____ the Golden Rule level of capital per worker.

Is larger than

In 1936, _____ published The General Theory of Employment, Interest, and Money, the book that transformed macroeconomics.

John Maynard Keynes

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

LM; right

If the production function is y = k1/2, s = 0.4, n = 0.02, and δ = 0.08, then the steady-state level of capital per worker is _____ the Golden Rule level.

Less than

If the production function is y = k1/2, s = 0.4, and δ = 0.1, then the steady-state level of capital per worker is _____ the Golden Rule level.

Less than If y = k1/2, s = 0.4, and δ = 0.1, the steady state occurs when 0.4 × k1/2 = 0.1 × k or at k* = 16.

In a typical recession, consumption falls. Investment moves in the same direction as consumption but proportionately ________.

More

Exhibit: Saving, Investment, and the Interest Rate 1The economy begins in equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government increases spending, holding other factors constant?

Point A

If nominal wages cannot be cut, then the only way to reduce real wages is by:

adjustments via inflation.

1. An expansion in aggregate demand increases ________ in the short run. 2. In the long run, however, it increases only the _______.

Real GDP; price level

All of the following actions are investments in the sense of the term used by macroeconomists except:

Sandra Santiago's buying 100 shares of Apple stock.

The book that substantially changed macroeconomics in 1936 was:

The General Theory of Employment, Interest, and Money

According to the liquidity preference model, _____ adjusts to bring equilibrium in the money market.

The interest rate

According to the liquidity preference theory, _____ are treated as exogenous variables.

The price level and the money supply

An increase in the saving rate will have:

a level effect but no growth effect.

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as ______, so their consumption will ______.

a rescheduling of taxes into the future; remain unchanged

In the Solow growth model, if two countries are otherwise identical (with the same production function, same saving rate, same depreciation rate, and same rate of population growth) except that Country Large has a population of 1 billion workers and Country Small has a population of 10 million workers, the steady-state level of output per worker will be _____, and the steady-state growth rate of output per worker will be _____.

the same in both countries; the same in both countries

Frictional unemployment is unemployment caused by:

the time it takes workers to search for a job.

According to the text, the _____ is the building block for the LM curve.

theory of liquidity preference

A decrease in the real money supply, other things being equal, will shift the LM curve:

upward and to the left

Which per-worker production function does NOT exhibit diminishing returns to capital?

y = k