ECN 101 HW QUESTIONS

According to the sticky-price model, output will be at the natural level if: a) expectations are formed adaptively, but not if expectations are formed rationally b) firms expect a high price level and the demand for goods is high c) the price level equals the expected price level d) the proportion of firms with flexible prices equals the proportion of firms with sticky prices

(c) the price level equals the expected price level

All of the following are causes of structural unemployment except: a) efficiency wages b) the monopoly power of unions c) unemployment insurance d) minimum wage laws

(c) unemployment insurance

The property of diminishing marginal product means that, after a point, when additional quantities of: a) both labor and capital are added, the marginal product of labor diminishes. b) both labor and capital are added, output diminishes. c) a factor are added, output diminishes. d) a factor is added when another factor remains fixed, the marginal product of that factor diminishes.

(d) a factor is added when another factor remains fixed, the marginal product of that factor diminishes.

In an economy with no population growth and no technological change, steady-state consumption is at its greatest possible level when the marginal product of: a) capital equals zero b) labor equals the marginal product of capital c) labor equals the depreciation rate d) capital equals the depreciation rate

(d) capital equals the depreciation rate

If the national saving rate increases, the a) capital-labor ratio will increase forever b) economy will grow at a faster rate forever c) capital-labor ratio will eventually decline d) economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached

(d) economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached

According to the Phillips curve, other things being equal, inflation depends positively on: a) the rate of technological change b) the unemployment rate c) the quantities of capital and labor d) expected inflation

(d) expected inflation

Every indifference curve shows combinations of first-period and second-period consumption that: a) are available to the consumer b) are tangent to the intertemporal budget constraint c) have equal income and substitution effects d) make the consumer equally happy

(d) make the consumer equally happy

All of the following would contribute to U.S. GDP, except: a) Amazon builds a new warehouse in New Jersey b) A software company buys a laptop produced this year for product development c) you buy a new house built in the current year d) you buy a house built in 2009

(d) you buy a house built in 2009

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

0

The next several questions refer to the case of an economy with the following equations: Production function : Y = 5K + 2L, with factor supplies: K=100 and L=250 Consumption function: C = 200 + 0.5(Y-T) Investment function: I = 300 - 100r Government: G =70, T=100 (Assume a closed economy: Y = C + I + G). Compute the equilibrium level of the interest rate.

0.2

If the demand function for money is M/P = 0.5Y - r, then the slope of the LM curve is:

0.5

Refer to a case with the following production function: Y = 25K3/5L2/5, where the level of capital in the economy is 500 and the level of labor in the economy is 500. Compute the equilibrium real WAGE.

10

If y = 4k1/2, population growth is 9%, there is no technological progress, 11% of capital depreciates each year, and a country saves 10% of output each year, then the Golden rule level of capital per worker is:

100

Which of the following shifts the LM curve to the left? a) exogenous rise in real money demand b) rise in taxes c) exogenous rise in money supply d) rise in government spending

(a) exogenous rise in real money demand

An explanation for the slope of the LM curve is that as: a) income rises, money demand rises, and a higher interest rate is required. b) income rises, money demand rises, and a lower interest rate is required. c) the interest rate increases, income becomes higher. d) the interest rate increases, income becomes lower.

(a) income rises, money demand rises, and a higher interest rate is required

If an economy with no population growth or technological change has a steady-state MPK of 0.2, a depreciation rate of 0.25, and a saving rate of 0.5, then to achieve the Golden Rule steady-state capital stock, the saving rate: a) needs to be higher b) is just right c) needs to be lower d) needs to be 100%

(c) needs to be lower

In a system with 100-percent-reserve banking: a) all banks must hold reserves equal to 100 percent of their loans b) the banking system completely controls the size of the money supply c) no banks can make loans d) no banks can accept deposits

(c) no banks can make loans

The Keynesian consumption function exhibits all of the following properties except that: a) the marginal propensity to consume is between 0 and 1 b) the average propensity to consume decreases as income increases c) only unexpected policy changes influence consumption d) current income is the primary determinant of consumption

(c) only unexpected policy changes influence consumption

An interest rate-output combination that is above the LM curve indicates that: a) real money demand is greater than real money supply. b) real money demand equals real money supply. c) real money demand is less than real money supply d) the money market clears.

(c) real money demand is less than real money supply

If y = 3k1/2, the country saves 20% of its output each year, and the steady-state level of capital per worker is 16, then the steady-state levels of output per worker and consumption per worker are:

12 and 9.6 respectively

If the per-worker production function is given by y = 2k1/2, the saving rate is 15%, and the depreciation rate is 6%, then the steady-state ratio of capital to labor is (assume no population growth or technological progress):

25

If the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.03 and the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is:

25%

The next several questions refer to the case of an economy with the following equations: Production function : Y = 5K + 2L, with factor supplies: K=100 and L=250 Consumption function: C = 200 + 0.5(Y-T) Investment function: I = 300 - 100r Government: G =70, T=100 (Assume a closed economy: Y = C + I + G). Compute the equilibrium level of investment.

250

Y = 36K0.5L0.5 with K=400 and L=400 G=2000, T=2000 I=5400-500r C=900+0.5(Y-T) real money demand = 0.2Y-400r nominal money supply: M = 5600 (Assume closed economy: Y = C + I + G. Assume the economy is in the long run equilibrium.) Suppose the government cuts the money supply by one fourth from 5600 to 4200. Compute the nominal wage.

27

Refer to a case with the following production function: Y = 25K3/5L2/5, where the level of capital in the economy is 500 and the level of labor in the economy is 500. What fraction of output in this economy is paid to the owners of capital?

3/5

In Irvin Fisher's two-period consumption model, if Y1=20,000, Y2=15,000, and the interest rate r is 0.50 (50 percent), then the maximum possible consumption in period one is:

30,000

If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:

300

Y = 36K0.5L0.5 with K=400 and L=400 G=2000, T=2000 I=5400-500r C=900+0.5(Y-T) real money demand = 0.2Y-400r nominal money supply: M = 5600 (Assume closed economy: Y = C + I + G. Assume the economy is in the long run equilibrium.) Compute the nominal wage (W):

36

Assume that total output in a two-good economy in 2020 consists of 10,000 cups of coffee and 50 laptops, with prices of $2 per cup of coffee and $1,000 per laptop. And suppose the output in 2021 is 15,000 cups of coffee and 70 laptops, with prices $2.5 per cup of coffee, and $850 per laptop. Compute the percentage growth in real GDP in 2021 compared to 2020, using 2020 as a base year.

42.9%

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

50 and the interest rate falls by 0.5 percent.

The next several questions refer to the case of an economy with the following equations: Production function : Y = 5K + 2L, with factor supplies: K=100 and L=250 Consumption function: C = 200 + 0.5(Y-T) Investment function: I = 300 - 100r Government: G =70, T=100 (Assume a closed economy: Y = C + I + G). Compute the equilibrium level of consumption.

650

Which of the following shifts the IS curve to the right? a) cut in taxes b) cut in government spending c) exogenous rise in money demand d) rise in money supply

a) cut in taxes

Assume two economies are identical in every way except that one has a higher population growth rate. According to the Solow growth model, in the steady state the country with the higher population growth rate will have a ____ level of output per person and ____ rate of growth of output per worker as/than the country with the lower population growth rate.

lower; the same

In the Solow growth model, an economy in the steady state with a population growth rate of n but no technological growth will exhibit a growth rate of total output at rate:

n

Refer to a case with the following production function: Y = 25K3/5L2/5, where the level of capital in the economy is 500 and the level of labor in the economy is 500. Suppose new immigration laws increase the labor supply. How will this affect the real rental rate on capital?

rise

An increase in the real money supply will make the LM curve ____ and the IS curve ____:

shift right; not move

When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the slope of the line denotes:

the marginal product of capital

With the minimum wage law, which of the followings could happen? a) unemployment rate drops b) the quantity of labor supplied exceeds the quantity demanded c) frictional unemployment increases d) more firms are willing to hire in the labor market

b) the quantity of labor supplied exceeds the quantity demanded

Open-market operations are: a) Treasury Department purchases and sales of the U.S. gold stock b) Commerce Department efforts to open foreign markets to international trade c) Federal Reserve purchases and sales of government bonds d) Securities and Exchange Commission rules requiring open disclosure of market trades

c) Federal Reserve purchases and sales of government bonds

The Golden Rule level of capital accumulation is the steady state with highest level of:

consumption per worker

If a larger share of national output is devoted to investment, then living standards will: a) always rise in both the short and long runs b) always decline in the short run but rise in the long run c) rise in the short run but may not rise in the long run d) decline in the short run and may not rise in the long run

d) decline in the short run and may not rise in the long run

If the nominal interest rate rises by 5 percent and the inflation rate increases by 1 percent, the real interest rate must:

increase by 4 percent

Across countries of Europe, greater spending on unemployment insurance tends to _____ unemployment and more "active" labor-market policies tend to _____ unemployment.

increase; decrease

The relationship between short-run aggregate supply curves and Phillips curves is that there: a) is exactly one Phillips curve corresponding to each short-run aggregate supply curve b) are several Phillips curves for each short-run aggregate supply curve c) are several short-run aggregate supply curves for each Phillips curve d) is no relationship between short-run aggregate supply curves and Phillips curves

(a) is exactly one Phillips curve corresponding to each short-run aggregate supply curve

If an economy with no population growth or technological change has a steady-state MPK of 0.1, a depreciation rate of 0.2, and a saving rate of 0.15, then the steady-state capital stock: a) is greater than the Golden Rule level b) is less than the Golden Rule level c) equals the Golden Rule level d) could be either above or below the Golden Rule level

(a) is greater than the Golden Rule level

Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is: a) less than the expected price level b) greater than the expected price level c) equal to the natural price level d) stuck at the existing price level

(a) less than the expected price level

In the Solow growth model, with a given production function, depreciation rate, saving rate, and no technological change, lower rates of population growth produce: a) lower steady-state growth rates of total output b) lower steady-state ratios of capital per worker c) lower steady-state growth rates of output per worker d) lower steady-state levels of output per worker

(a) lower steady-state growth rates of total output

Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except: a) prices do not adjust when there is perfect competition b) they do not want to annoy their frequent customers c) it is costly to alter prices d) some prices are set by long-term contracts between firms and consumers

(a) prices do not adjust when there is perfect competition

The average propensity to consume is the: a) ratio of consumption to income b) ratio of consumption to wealth c) amount consumed out of an additional dollar of income d) amount available for consumption after precautionary saving

(a) ratio of consumption to income

The theoretical separation of real and monetary variables is called: a) the classical dichotomy b) monetary neutrality c) the Fisher effect d) the quantity theory of money

(a) the classical dichotomy

The IS and LM curves together generally determine: a) the interest rate only b) both income and the interest rate c) income, the interest rate, and the price level d) income only

(b) both income and the interest rate

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) provide capital for new workers b) equal the marginal productivity of capital (MPK) c) keep the level of capital per worker constant d) offset the depreciation of existing capital

(b) equal the marginal productivity of capital (MPK)

In the long run, the level of national income in an economy is determined by its: a) real and nominal interest rate. b) factors of production and production function c) rate of economic and accounting profit. d) government budget surplus or deficit.

(b) factors of production and production function

Using the information from the two-good economy above, compute the GDP deflator for 2021 (using 2020 as the base year). What does it say is happening to average price level from 2020 to 2021. a) ambiguous from the given information, since some prices are rising and others falling b) falling c) rising d) not changing

(b) falling

Most economists believe that prices are: a) flexible in the short run but many are sticky in the long run. b) flexible in the long run but many are sticky in the short run. c) sticky in both the short and long runs. d) flexible in both the short and long runs.

(b) flexible in the long run but many are sticky in the short run

The Phillips curve depends on all of the following forces except: a) expected inflation b) the current exchange rate c) supply shocks d) the deviation of unemployment from its natural rate

(b) the current exchange rate

Which of the following conjectures that underlie the Keynesian consumption function is not consistent with aggregate U.S. data? a) The marginal propensity to consume is between 0 and 1 b) Current income is a determinant of consumption c) The average propensity to consume decreases as income increases d) There is a high correlation between income and consumptions

(c) The average propensity to consume decreases as income increases

The Phillips curve expresses a short-run link: a) among nominal variables b) among real variables c) between nominal and real variables d) among unexpected variables

(c) between nominal and real variables

The IS curve shows equilibrium in the: a) money market b) goods market and money market c) goods market d) neither the goods market nor the money market

(c) goods market

In the Keynesian-cross model, if government purchases increase by 20, then the equilibrium level of income will: a) increase by 20 b) increase, but by less than 20 c) increase by more than 20 d) decrease by more than 20 e) decrease by 20

(c) increase by more than 20

In Irvin Fisher's two-period model, if consumption in both periods is a normal good, then an increase in income in period two: a) increases consumption in period two only b) does not increase consumption in either period c) increases consumption in both periods d) increases consumption in period one only

(c) increases consumption in both periods

In the Keynesian-cross model with a given MPC greater than 0 and less than 1, the government-expenditure multiplier ______ the tax multiplier. a) is smaller than b) equals c) is larger than d) is the inverse of

(c) is larger than

The formula for the steady-state ratio of capital to labor (k*), with no population growth or technological change, is s... a) divided by the product of f(k*) and the depreciation rate b) divided by the depreciation rate c) multiplied by f(k*) divided by the depreciation rate d) multiplied by the depreciation rate

(c) multiplied by f(k*) divided by the depreciation rate

Production function : Y = 5K + 2L, with factor supplies: K=100 and L=250 Consumption function: C = 200 + 0.5(Y-T) Investment function: I = 300 - 100r Government: G =70, T=100 Now change the model so that the consumption function involves the interest rate as follows: C = 200 + 0.5(Y-T) - 300r Compute the equilibrium values of the interest rate and investment for the cases of G=70 and G = 90. How much is investment crowded out now by the rise in G? Report below the amount by which investment falls when G rises from 70 to 90.

15

Refer to a case with the following production function: Y = 25K3/5L2/5, where the level of capital in the economy is 500 and the level of labor in the economy is 500. Under the assumptions of the Neoclassical model, Compute the equilibrium real rental rate of capital.

15

Y = 36K0.5L0.5 with K=400 and L=400 G=2000, T=2000 I=5400-500r C=900+0.5(Y-T) real money demand = 0.2Y-400r nominal money supply: M = 5600 (Assume closed economy: Y = C + I + G. Assume the economy is in the long run equilibrium.) Compute the real wage (W/P):

18

Y = 36K0.5L0.5 with K=400 and L=400 G=2000, T=2000 I=5400-500r C=900+0.5(Y-T) real money demand = 0.2Y-400r nominal money supply: M = 5600 (Assume closed economy: Y = C + I + G. Assume the economy is in the long run equilibrium.) Compute the real wage after the money supply cut to 4200.

18

Y = 36K0.5L0.5 with K=400 and L=400 G=2000, T=2000 I=5400-500r C=900+0.5(Y-T) real money demand = 0.2Y-400r nominal money supply: M = 5600 (Assume closed economy: Y = C + I + G. Assume the economy is in the long run equilibrium.) Compute the aggregate price level (P):

2

Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy _____ percent of one year's GDP.

20

The next several questions refer to the case of an economy with the following equations: Production function : Y = 5K + 2L, with factor supplies: K=100 and L=250 Consumption function: C = 200 + 0.5(Y-T) Investment function: I = 300 - 100r Government: G =70, T=100 (Assume a closed economy: Y = C + I + G). Suppose government spending is raised to 90 (instead of 70). Compute the amount by which investment falls.

20

Suppose NOMINAL GDP rises by 1% and the GDP deflator falls by 2%. By how much does REAL GDP change?

Rise 3%

Y = 36K0.5L0.5 with K=400 and L=400 G=2000, T=2000 I=5400-500r C=900+0.5(Y-T) real money demand = 0.2Y-400r nominal money supply: M = 5600 (Assume closed economy: Y = C + I + G. Assume the economy is in the long run equilibrium.) Does the Classical Dichotomy hold?

Yes

Banks create money in: a) neither a 100-percent-reserve banking system nor a fractional-reserve banking system b) a fractional-reserve banking system but not in a 100-percent-reserve banking system c) a 100-percent-reserve banking system but no in a fractional-reserve banking system d) both a 100-percent-reserve banking system and a fractional-reserve banking system

b) a fractional-reserve banking system but not in a 100-percent-reserve banking system

Which of the following could explain a recession where the interest rate is high? a) fall in consumer confidence b) cut in money supply c) exogenous rise in investment d) fall in money demand

b) cut in money supply

Which of the following can potentially reduce frictional unemployment? a) more labor unions b) government programs help to disseminate information of job openings and job seekers c) minimum wage laws d) higher unemployment benefits

b) government programs help to disseminate information of job

The assumption of rational expectations for inflation means that people will form their expectations of inflation by: a) asking the opinions of the best experts b) optimally using all available information, including information about current policies, to forecast the future c) subscribing to the forecasting service that uses the best econometric model d) basing their opinions on recently observed inflation

b) optimally using all available information, including information about current policies, to forecast the future

The Solow model with population growth but no technological change cannot explain persistent growth in standards of living because: a) depreciation grows faster than output b) output, capital, and population all grow at the same rate in the steady state c) capital and population grow, but output does not keep up d) total output does not grow

b) output, capital, and population all grow at the same rate in the steady state

The money multiplier will increase if the: a) currency-deposit ratio increases b) reserve-deposit ratio decreases c) monetary base increases d) discount rate increases

b) reserve-deposit ratio decreases

If the real interest rate and the real national income are constant, according to the quantity theory and the Fisher effect, a 3 percent increase in money growth will lead to rises in: a) both inflation and the nominal interest rate of less than 3 percent b) inflation of 3 percent and the nominal interest rate of more than 3 percent c) inflation of 3 percent and the nominal interest rate of less than 3 percent d) inflation of 3 percent and the nominal interest rate of 3 percent

d) inflation of 3 percent and the nominal interest rate of 3 percent

Examination of data from households shows that households with high current income ______ than do households with low current income. a) save a smaller fraction of current income b) save less c) consume less d) save a larger fraction of current income

d) save a larger fraction of current income

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

decrease; decrease; decrease; decrease

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment ______, and this shifts the expenditure function ______, thereby decreasing income.

decreases; downward

Go back to the original consumption function (C = 200 + 0.5(Y-T)), and suppose instead that there is an increase in tax (assume no change in government spending now). What will the effect be on consumption. (You can answer this based on your intuitive understanding o f the model, or you can answer it by plugging numbers of your choosing into the model to compute an answer mathematically.)

fall

Refer to a case with the following production function: Y = 25K3/5L2/5, where the level of capital in the economy is 500 and the level of labor in the economy is 500. How will the increase in immigration affect the real wage?

fall

The tax increase makes the interest rate ______ and investment ______ in this model.

fall, rise

The next several questions refer to the case of an economy with the following equations: Production function : Y = 5K + 2L, with factor supplies: K=100 and L=250 Consumption function: C = 200 + 0.5(Y-T) Investment function: I = 300 - 100r Government: G =70, T=100 (Assume a closed economy: Y = C + I + G). The amount by which investment falls is ______ the amount by which government spending rises

the same as

Refer to a case with the following production function: Y = 25K3/5L2/5, where the level of capital in the economy is 500 and the level of labor in the economy is 500. Does Euler's theorem hold?

yes