Macro HW2

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

A) $1 billion; more than $1 billion

Using Okun's law, it may be computed that if the Fed reduces the money supply 5% and the quantity theory of money is true, then the unemployment rate will rise about:

2.5 percent in the short run but will return to its natural rate in the long run

Suppose an economy is initially in a steady state with capital per worker exceeding the Golden Rule level. If the saving rate falls to a rate consistent with the Golden Rule, then in the transition to the new steady state, consumption per worker will: A) always exceed the initial level. B) first fall below then rise above the initial level. C) first rise above then fall below the initial level. D) always be lower than the initial level.

A) always exceed the initial level.

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by: A) increasing the money supply, but at the cost of permanently higher prices. B) decreasing the money supply, but at the cost of permanently lower prices. C) increasing the money supply, which would restore the original price level. D) decreasing the money supply, which would restore the original price level.

A) increasing the money supply, but at the cost of permanently higher prices.

6. In a steady-state economy with a saving rate s, population growth n, and labor augmenting technological progress g, the formula for the steady-state ratio of capital per effective worker (k*), in terms of output per effective worker (f(k*)), is (denoting the depreciation rate by d): A) sf(k)/(d + n + g). B) s/((f(k))( d + n + g)). C) f(k)/((s)( d + n + g)). D) (s - f(k))/( d + n + g).

A) sf(k)/(d + n + g).

In a steady state with population growth and technological progress: A) the real rental price of capital is constant and the real wage grows at the rate of technological progress. B) the real rental price of capital grows at the rate of technological progress and the real wage is constant. C) both the real rental price of capital and the real wage grow at the rate of technological progress. D) both the real rental price of capital and the real wage are constant.

A) the real rental price of capital is constant and the real wage grows at the rate of technological progress.

13. Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government: A) prices will rise in both the short run and the long run. B) output will rise in the short run and prices will rise in the long run. C) output will rise in both the short run and the long run. D) prices will rise in the short run and output will rise in the long run.

B) output will rise in the short run and prices will rise in the long run.

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:

C) 4.

If the marginal product of capital net of depreciation equals 10 percent and the rate of population growth equals 2 percent, then this economy will be at the Golden Rule steady state if the rate of technological progress equals _____ percent.

C) 8

5. In the Solow growth model of an economy with population growth but no technological change, the break-even level of investment must do all of the following except: A) offset the depreciation of existing capital. B) provide capital for new workers. C) equal the marginal productivity of capital (MPK). D) keep the level of capital per worker constant.

C) equal the marginal productivity of capital (MPK).

16. In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of: A) liquidity preference. B) the government-purchases multiplier. C) unplanned inventory investment. D) real money balances.

C) unplanned inventory investment.

In the Solow growth model with no population growth and no technological progress, a key determinant of the growth rate of the steady state capital-per-worker is: A) The saving rate. B) The depreciation rate. C) Both the saving rate and depreciation rate. D) Neither the saving rate nor the depreciation rate.

D) Neither the saving rate nor the depreciation rate.

In the two-sector R&D endogenous growth model, the fraction of labor in universities (u) affects the steady-state: A) level of income. B) growth rate of income. C) level of income and growth rate of income. D) level of income, growth rate of income, and growth rate of the stock of knowledge

D) level of income, growth rate of income, and growth rate of the stock of knowledge

1. In the Solow growth model with no population growth and no technological progress,the higher the steady capital-per-worker ratio, the higher the steady-state: A) growth rate of total output. B) level of consumption per worker. C) growth rate of output per worker. D) level of output per worker.

D) level of output per worker.

10. According to the AK model of endogenous growth, the growth rate of total output would increase permanently due to all of the following except: A) higher saving rate. B) higher marginal product of capital (MPK). C) lower depreciation rate D) lower population growth rate.

D) lower population growth rate.

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of DT will:

decrease equilibrium income by (DT)(MPC)/(1 - MPC).

11. The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If theunemployment rate fell by 1 percentage point over a year, Okun's law predicts that real GDP would:

increase by 5 percent. % change in real GDP = 3% - 2 x (change in unemployment rate)

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income:

increases by more than 250.

20. In the Keynesian-cross model, the equilibrium level of income is determined by:

planned spending.