Achieve Macro Ch 5-10

If the demand for real money balances depends on the nominal interest rate, then higher inflation can

arise from the expectation of future money growth.

In a small, open economy, if net exports are negative, then:

domestic spending is greater than output.

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 these EXCEPT:

equal the marginal productivity of capital (MPK)

When a person purchases a 90-day Treasury bill, he or she cannot know the:

ex post real interest rate.

According to the Fisher effect, an increase in ______ causes an equal increase in the ______

expected, nominal

Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase:

exports by the small open economy.

In the Solow model, if the economy starts with more capital per worker than the steady-state level of capital per worker, then the capital per worker will _____ and the output per worker will _____ as the economy approaches steady state.

fall; fall

Suppose an economy is at its steady-state equilibrium and there is a permanent reduction in the saving rate of the economy. In this case, as the economy approaches its new steady state, capital per worker will _____ and output per worker will _____.

fall; fall

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

fall; more

Analysis of population growth around the world concludes that countries with high population growth tend to:

have a lower level of income per worker than countries with low population growth.

One explanation for the differing numbers of hours worked in the United States and western Europe is the

higher level of taxes in Europe

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

increasing taxes

According to the Solow model, if an economy increases its saving rate, then in the new steady state, compared with the old one, the marginal product of capital will be_____, and the growth rate of income per person will be ______

lower, the same

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to:

make loans to foreigners

The total output of an economy grows at 4 percent and the depreciation rate is 3 percent. Further, the capital stock is 6 times one year's GDP and the capital income is 30 percent of GDP. In this case, we can conclude that the economy is operating at a level of capital _____ than the Golden Rule and _____ saving will lead to more consumption in the long run.

more; decreasing

In the Solow model with technological progress, the steady-state growth rate of total output is:

n + g

In the Solow model with technological progress, total capital income and total labor income grow the rate:

n + g

When an economy begins above the Golden Rule level, reaching the Golden Rule level:

results in higher consumption at all times in the future.

In a steady-state economy with a saving rate s, population growth n, depreciation rate 𝛿δ, and labor-augmenting technological progress g, the steady-state ratio of capital per effective worker (k*), in terms of output per effective worker (f (k*)), is

sf (k) / (δ + n + g).

The inconvenience associated with reducing money holdings to avoid the inflation tax is called:

shoeleather costs

The type of legal system and the level of corruption in a country have been found to be:

significant determinants of the rate of economic growth in a country.

Other things equal, an increase in the world interest rate pushes the trade balance toward _____ and causes the currency to ____

surplus, depreciate

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

Endogenous growth theory rejects the assumption of exogenous:

technological change.

According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by:

the Federal Reserve

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

An economy without population growth or technological progress has the production function 𝑦=20𝑘12y=20k12. The current capital stock is 100, the depreciation rate is 10%, and the population growth rate is 2%. For income per person to grow, what rate must the saving rate exceed?

6

If the production function is Y = AK2/3L1/3 in the land of Antegria, and the labor force increases by 3 percent, capital stock increases by 3 percent, and TFP grows by 3 percent, then the total output growth is _____ percent.

6

An economy with constant velocity of money has real GDP growth of 3%, money growth of 7%, and a real interest rate of 2%. The nominal interest rate is

6 percent

The value of net exports is also the value of:

the difference of national saving and domestic investment.

When the unemployment rate is at a steady state:

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

In the Solow growth model, the assumption of constant returns to scale means that:

the number of workers in an economy does not affect the relationship between output per worker and capital per worker.

In the Solow growth model with population growth but no technological progress, when the economy finds itself at the Golden Rule steady state, the marginal product of capital minus the rate of depreciation will equal:

the population growth rate.

Although not a goal of the unemployment-insurance system, one effect is that the system reduces

the rate of job finding.

In a steady state with population growth and technological progress:

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

Conditional convergence occurs when economies converge to:

their own individual steady states.

All of these are causes of structural unemployment EXCEPT:

unemployment insurance.

According to studies of individual unemployed workers, these workers are MOST likely to find a job:

within a few weeks of their unemployment insurance running out.

According to the theory of efficiency wages, paying an above-equilibrium wage may increase all the following except

worker turnover.

The main goal of the unemployment-insurance system is to reduce

workers' uncertainty about their incomes.

If the production function is y = k1/2, the steady-state value of y in the Solow model with population growth and technological progress is:

y = s / (δ + n + g)

Which of these policies of the government is NOT designed to increase resources devoted to research and development?

Increasing the amount people can put in tax-exempt retirement accounts.

_____ cause(s) the capital stock to rise, while _____ cause(s) the capital stock to fall.

Investment; depreciation

Is the small increase in benefits a "downside" of low inflation, as the article suggested?

No, as long as inflation is measured correctly, Social Security beneficiaries' purchasing power will not change.

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

c* = f (k*) - 𝛿δk*

Based on a Cobb-Douglas production function and perfect capital mobility, capital should flow to economies in which:

capital is relatively scarce.

In the Solow growth model with population growth but no technological progress, the steady-state amount of investment can be thought of as a break-even amount of investment because the quantity of investment just equals the amount of:

capital needed to replace depreciated capital and to equip new workers.

Hyperinflation tend to occur when

central banks finance large government budget deficits.

The consumption function in the Solow model assumes that society saves a:

constant proportion of income.

In the Solow model with technological progress, capital's share of income is _______ , and labor's share of income is ________

constant, constant

Suppose the economy is originally at a steady state where the marginal product of capital is less than the depreciation rate. If the saving rate of the economy changes to a rate consistent with the golden rule level of capital, then at the new steady state

consumption per worker will be higher compared to the original steady state.

In the two-sector endogenous growth model, income growth persists because the:

creation of knowledge in universities never slows down.

The balanced growth property of the Solow growth model with population growth and technological progress predicts which of these sets of variables will grow at the same rate in the steady state?

output per worker, capital per worker, real wage

Suppose that an economy is in its steady state and the capital stock is above the Golden Rule level. Assuming that there are no population growth or technological change, if the saving rate falls:

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

The rate of inflation is the:

percentage change in the overall level of prices.

Wage rigidity:

prevents labor demand and labor supply from reaching the equilibrium level

Any policy aimed at lowering the natural rate of unemployment must either _____ the rate of job separation or _____ the rate of job finding.

reduce; increase

The central bank doubles the money supply. the trade balance ____ the real exchange rate____ the nominal exchange rate____

remain unchanged, remains unchanged, falls

The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars. the trade balance ____ the real exchange rate____ the nominal exchange rate____

remains unchanged, falls, falls

New regulations restricting the use of credit cards increase the demand for money. the trade balance ____ the real exchange rate____ the nominal exchange rate____

remains unchanged, remains unchanged, rises

When an economy's capital is below the Golden Rule level, reaching the Golden Rule level:

requires initially reducing consumption to increase consumption in the future.

A fall in consumer confidence about the future induces consumers to spend less and save more. the trade balance ____ the real exchange rate____ the nominal exchange rate____

rises, falls, falls

The Solow model shows that a key determinant of the steady-state ratio of capital to labor is the:

saving rate.

Economists call the changes in the composition of demand among industries and regions:

sectoral shifts.

Unemployment insurance increases the amount of frictional unemployment by:

softening the economic hardship of unemployment.

If an economy is in a steady state with no population growth or technological change and the marginal product of capital is less than the depreciation rate:

steady-state consumption per worker would be higher in a steady state with a lower saving rate.

In a small open economy, starting from a position of balanced trade, if the government increases the income tax, this produces a tendency toward a trade _____ and _____ net capital outflow.

surplus; positive

According to the Solow model, persistently rising living standards can only be explained by:

technological progress

Unions and collective bargaining have an especially smaller role in

the United States

The theoretical separation of real and monetary variables is called:

the classical dichotomy.

In the basic Solow model, at the Golden Rule steady state, the marginal product of capital equals

the depreciation rate.

The rate of labor-augmenting technological progress (g) is the growth rate of:

the efficiency of labor

A depreciation of the real exchange rate in a small open economy could be the result of:

the expiration of an investment tax-credit provision.

One efficiency-wage theory implies that firms pay high wages because:

the more a firm pays its workers, the greater their incentive to stay with the firm.

If a war destroys a large portion of a country's capital stock but the saving rate is unchanged, the Solow model predicts that output will grow and that the new steady state will approach:

the same level of output per person as before.

Policymakers link increases in Social Security and other benefits to inflation because

they wish to ensure that the real value of these benefits is constant over time.

Which of these statements is NOT true about the steady state in the Solow Model with population and technological progress:

total capital stock and total output grow at the rate of population growth.

All of these are reasons for frictional unemployment EXCEPT:

unemployed workers accept the first job offer that they receive

In the Solow model with technological progress, the real rental price of capital grows at a rate of _____, and the real wage grows at a rate of ______. (Hint: The real rental price of capital equals total capital income divided by the total capital stock, and the real wage equals total labor income

0, g

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:

0.18

Assume that an economy described by the Solow model is in a steady state with output and capital growing at 3 percent and labor growing at 1 percent. The capital share is 0.3. The growth-accounting equation indicates that the contributions to growth of capital, labor, and total factor productivity are:

0.9 percent, 0.7 percent, and 1.4 percent, respectively.

If y = k1/2, there is no population growth or technological progress, 5 percent of capital depreciates each year, and a country saves 20 percent of output each year, then the steady-state level of capital per worker is:

16

An economy produces 50 widgets, which sell for $4 each, and has a money supply of $100. What is the velocity of money?

2

Suppose the price of a cup of coffee is $3 in Boston and 6 euros in Berlin. Use this information to properly answer the following question. According to the theory of purchasing power parity, the exchange rate is

2 euros per dollar.

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:

20,000.00

Suppose an economy has 100 units of capital, 100 units of labor, and the efficiency of each worker is equal to 2. The effective number of workers for this economy is _____ and the capital per effective worker is _____.

200; 1/2

If the contribution of capital to growth in output is 1.5 percent, the contribution of labor is 0.5 percent, and the Solow residual growth is equal to 1 percent, then total output must be growing at:

3 percent.

Consider the money demand function that takes the form (M/P)d = Y/(4i), where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?

4i

The earned income tax credit:

does not raise labor costs.

In the Solow model with technological progress, the steady-state growth rate of capital per effective worker is:

0

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

0

When capital increases by ΔΔK units, output increases by:

MPK × ΔK units

Which of these is an example of frictional unemployment?

Dave searches for a new job after voluntarily moving to San Diego.

If Y is output, K is capital, u is the fraction of the labor force in universities, L is labor, E is the stock of knowledge, and the production Y = F (K, (1 - u) EL) exhibits constant returns to scale, then output (Y) will double if:

K and E are doubled.

Which of these statements is NOT true about the creation of knowledge and the process of research and development?

Knowledge is a private good, that is, rival and excludable.

According to the quantity equation, the percentage change in P is approximately equal to the percentage change in:

M minus the percentage change in Y plus the percentage change in velocity

Which of these would be called a hyperinflation? Price increases averaged 1% percent per day. The inflation rate was 10 percent per year. Real gross domestic product (GD grew at a rate of 12 percent over a year. A stock market index rose by 1,000 points over a year.

Price increases averaged 1% percent per day.

Which of these statements is NOT true about the steady state of the basic Solow model? The capital per worker and output per worker are constant. The investment per worker is always equal to the depreciation per worker. The marginal product of capital always is equal to the depreciation rate. The saving and consumption per worker are constant.

The marginal product of capital always is equal to the depreciation rate.

Which of the following is the best representation of break-even investment (the amount of investment needed to keep capital per effective worker constant)? [δ+n+g(u)E]k [δ+n+g]k [δ+n+g(u)]k 𝑠𝐹[𝑘,(1−𝑢)]

[𝛿+𝑛+𝑔(𝑢)]𝑘

According to recent estimates produced by economists, the trade restrictions announced by President Donald Trump at the beginning of 2018 had this effect:

a decrease in the overall volume of trade.

Which of these characteristics made the 2008-2009 recession differ MOST sharply from previous recessions?

a large spike in the duration of unemployment

Which of the following events would cause a currency to depreciate? a rise in the price level a tax increase abroad a tax cut an investment boom

a rise in the price level

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

adjustments via inflation.

If an import restriction does not influence domestic investment or saving, it causes a country's currency to ______, resulting in ______

appreciate, an unchanged trade balance

If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on:

both the current and expected future money supply.

If a U.S. corporation sells a product to Canada and uses the proceeds to purchase a product manufactured in Canada, then U.S. net exports _____, and net capital outflows _____.

do not change; do not change

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.

decline; decrease

If the economy has more capital than in the Golden Rule steady state, reducing the saving rate will _______ steady-state income and _______ steady-state consumption.

decrease, increase

In the Solow model with population growth and no technological progress, an increase in the population growth rate leads to a(n) _____ in the effective investment rate leading to a(n) _____ in the steady-state income per worker.

decrease; decrease

Other things equal, an increase in government purchases of goods and services pushes the trade balance toward____ and causes the currency to _____

deficit, appreciate

If the government's tax revenue is less than what it spends, then the government runs a budget _____, which represents _____ public saving.

deficit; negative

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade _____ and _____ net capital outflow.

deficit; negative

The efficiency of labor:

depends on the knowledge, health, and skills of labor.

If the per worker production function for an economy is given by y = k1/2, the saving rate is 0.3, the depreciation rate is 10%, and the economy starts off with 25 units of capital per worker, then the capital per worker will _____ and output per worker will _____ as the economy approaches the steady state.

fall; fall

A tax reform increases the incentive for businesses to build new factories the trade balance ____ the real exchange rate____ the nominal exchange rate____

falls, rises, rises

In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:

falls, while the real exchange rate rises and net exports fall

In the two-sector endogenous growth model, output per worker grows at a rate of _____. The saving rate _______ affect the growth rate in this model. The fraction of the labor force in research universities _______ impacts the steady-state growth rate.

g(u), will not, positively

If the production function exhibited decreasing returns to scale, then increasing labor and capital in the same proportion would _____output by _____ than this proportion. Thus, increasing population would ______total output and _____ output per worker.

increase, less, increase, decrease

If the production function exhibited increasing returns to scale, then increasing labor and capital in the same proportion would ______ output by ________ than this proportion. Thus, increasing population would ______ total output and _______ output per worker.

increase, more, increase, increase

The real exchange rate:

is equal to the nominal exchange rate (measured in units of the foreign currency divided by units of home currency) multiplied by the domestic price level divided by the foreign price level.

When a nation runs a trade deficit,

it experiences a capital inflow

According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices _____ each year and give workers _____ raises.

less; smaller

In the steady state of the Solow model, higher population growth leads to a ______ level of income per worker and _____ growth in total income.

lower, higher

Government policies directed at reducing frictional unemployment include

making unemployment insurance 100 percent experience rated.

The real exchange rate is determined by the equality of:

net capital outflow and the demand for net exports.

In a large open economy, the real exchange rate adjusts so that net exports equal:

net capital outflow.

Schumpeter's thesis of "creative destruction" is an explanation of economic progress resulting from:

new product producers driving incumbent producers out of business.

An expansionary fiscal policy leads to _____ in investment spending for a small open economy, while it leads to _____ in investment spending for a large open economy.

no change; decrease

Variables expressed in terms of money are called _____ variables.

nominal

The real interest rate is equal to the:

nominal interest rate minus the inflation rate.

The opportunity cost of holding money is the:

nominal interest rate.

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

nominal interest rates.

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

not change

The macroeconomic problem that affects individuals most directly and severely is:

unemployment.

Because most loans are specifies in nominal terms, high ____ inflation hurts __--

unexpected, creditors

Balanced growth refers to the property where:

values of many variables within a country rise together in the steady state

The quantity theory of money assumes that:

velocity is constant.

A policy that increases the job-finding rate _____ the natural rate of unemployment.

will decrease

Which of the following is the best representation of the production function for manufactured goods in terms of output per effective worker and capital per effective worker? y=F[k,g(u)] y=F(k) y=F[k,(1−u)] 𝑦=𝐹[𝑘,𝑔(𝑢)𝐸]

y=F[k,(1−u)]

Which of the following production functions has constant returns to scale? 𝑌=𝐾^2+𝐿 𝑌=𝐾+𝐿 𝑌=𝐾^2𝐿 Y=𝐾^1/3𝐿^1/3

𝑌=𝐾+𝐿