ECN 313 Exam 1

If we see that the consumer's utility level has changed as a result of a change in economic environment, we conclude that this change is necessarily...

some income effect

Under the budget line...

suboptimal

The variables listed under MAX describe...

things that the consumer can affect

A budget constraint describes...

trade-off between consumption and leisure

The fact that employment tends to lag output suggests that....

During recessions, firms respond to worsening economic situations by cutting employment.

Evaluate the following statement: "Government expenses is acyclical. Thus, increasing the level of government expenditures in recessions should not be used as a policy to boost output".

I disagree. Since government expenses typically rise in recessions, the lack of historical correlation between government expenses and output does not mean that there is no causal relationship between them.

Is tangent point between an indifference curve and the budget line...

Is optimal

Suppose the government needs to raise additional tax revenue. It considers two options: to increase the lump-sum tax or to increase a proportionate labor income tax (so that both new taxes raise the same additional revenue). What can you say about intersection point of the budget lines under the two possible tax schemes?

It corresponds to the optimal choice under extra proportionate tax.

Which of the following patterns of comovement canNOT be observed on a scatter plot? 1. correlation 2. relative volatility 3. leading/lagging 4. neither of the above

Leading/lagging

In our model, we are interested in the behavior of aggregate variables, and thus model "average" consumer, good, firm, etc. If, however, we want to analyze to what extent it is true that the tax on soda drinks has a disproportionally large effect low-income households, we must explicitly model...

1. Consumers with different level of income 2. different types of goods

Suppose that, in a given economy, prices are constant over time but population is growing. Which of the following variables should you NOT use to analyze how economic well-being is changing over time. 1. GDP 2. per capita GDP 3. real GDP 4. real per capita GDP

1. GDP 3. Real GDP

Effects of tax reforms..

1. Higher tax RATES discourage labor supply. 2. the effects of changes in taxes on the labor supply curve depend on what kind of taxes are being adjusted

The new proportionate consumption tax introduced in the previous question...

1. Makes the budget line flatter 2. shifts the kink point down. 3. creates an income and a substitution effect.

Consumption is less volatile than GDP because...

1. Many consumption components are hard to adjust (such as housing, utilities, etc) 2. people can save a bigger fraction of their income in good times and dissave/borrow in bad times to smooth consumption over time.

When do we say that the economy is in a recession?

1. When real per capita GDP is below the trend. 2. When the economy exhibits two consecutive quarters of negative real per capita GDP growth.

An increase in the wage rate w creates an income effect and the substitution effect. Which of the following observations help to justify this statement?

1. as w increases, the level of utility chosen by the consumer adjusts. 2. as w increases, the slope of the budget line changes

Why do we impose the assumption that the substitution effect is greater than income effect?

1. because we want the model to be consistent with empirical evidence 2. because in the data the average consumer increases work hours in response to higher wages 3. because the empirical evidence suggests that the average worker is on the upward-sloping portion of the labor supply curve

Suppose that, in addition to the lump-sum tax T, a new proportionate labor income tax is introduced (which taxes labor income at rate t). What is the new budget constraint?

1. c = w(h-l) + pi - T - tw(h-l) 2. c = (1-t)w(h-l) + pi - T

Suppose that, in addition to the lump-sum tax T, a new proportionate tax on consumption is introduced (which taxes consumption at rate t). What is the new consumer's budget constraint?

1. c= w(h-l) + pi - T - tc 2. c = w(h-l)/(1+t) + (pi-T)/(1+t)

What is Modern macroeconomic analysis

1. is based on microfoundations (i.e. takes into the account the behavior of consumers, producers, and other economic agents. 2. Often is based on models formalizing supply and demand on different markets. 3. uses real life data to test and calibrate economic models.

What can you say about the optimal choice under the new proportionate tax?

1. it is feasible but not optimal under the extra lump sum tax 2. it results in less employment than the optimal choice under the new lump-sum tax

When we design macroeconomic models we try too...

1. keep the model simple 2. incorporate only the main tradeoffs / features necessary to study the question(s) we are interested in 3. disregard the real life features that may be of secondary importance for the question we are trying to answer.

The new proportionate labor income tax described in the previous question...

1. makes the budget line flatter 2. leads to a combination of income and substitution effects

What is the marginal condition that must hold if the consumer behaves optimally?

1. w=MRS 2. the slope of the indifference curve = the slope of the budget line

When we analyze how a change in lump-sum tax T affects the labor supply curve, we assume that wage rate in the corresponding consumer's problem does not adjust because...

1. we assume that the equilibrium wage is not affected by the change in tax T 2. Wages affect the slope of the budget line while tax T affects its level.

Which of the following suggest that real per capita GDP is not a perfect measure of economic well-being? 1.GDP does not measure the value-added created during home production 2. GDP does not take into account the income distribution 3. GDP underestimates the value of goods and services produced in the economy because of inflation 4.GDP inaccurately measures the value of goods and services produced by the government

1.GDP does not measure the value-added created during home production 2. GDP does not take into account the income distribution 3.GDP inaccurately measures the value of goods and services produced by the government

Which of the following statements is incorrect about business cycles data? 1. is often used to test macroeconomic models. 2. is too noisy and hard to analyze 3. helps us understand how different macroeconomic variables are related to each other. 4. sheds light on the driving forces of recessions

2. is too noisy and hard to analyze.

Suppose that y(t) describes how a variable y varies over time. Then the growth rate of this variable from year t to year t+1 is (approximately) equal to (select all the correct answers): 1. y(t+1) - y(t) 2. y(t+1)/y(t)-1 3. ln(y(t+1)/y(t)-1) 4. ln(y(t+1)) - ln(y(t))

2. y(t+1)/y(t)-1 4. ln(y(t+1)) - ln(y(t))

Suppose that S(t) measures a firm's sales over time. Which of the following plots will allow you to easily see the growth rate of sales over time? 1. S(t) over time 2. S(t+1)-S(t) over time 3. log(S(t)) over time 4. log (S(t)-S(t-1)) over time

3. log(S(t)) over time

Suppose unemployment and inflation are negatively correlated. Does it mean that they are procyclical, countercyclical, change over time in opposite directions, or change over time in the same direction?

Change over time in opposite directions.

What are the expenditure components of GDP?

Consumption, Investment, Government, and Net Exports

Which of the following stylized facts should we aim to replicate in a ONE-PERIOD macro model? (select all correct answers) 1. consumption is procyclical 2. consumption is less volatile than output 3. investment is procyclical 4. employment is procyclical 5. employment is lagging 6. labor productivity is procyclical

Consumption, employment, and labor productivity are procylical.

Which of the following variables are procyclical (selct all)? 1. consumption 2. investment 3. employment 4. labor productivity 5. government expenidtures

Consumption, investment, employment, labor productivity.

Which of the assumptions about the consumers' preferences guarantees that the indifferent curves are decreasing?

More is better than less

Which of the assumptions about the consumers' preferences guarantees that the indifferent curves do not intersect?

More is better than less

Match the economic factors listed below with the recession years during which the given factor was likely one of the key driving forces of the recession. Question: Oil price increase monetary contraction tax increase stock market crash Answers: 2008 1981 1990 2001

Oil price increase - 2008 monetary contraction - 1981 tax increase - 1990 stock market crash - 2001

GDP measures the total value of goods and services...

Produced within the borders of a country within a given time period.

Prices are countercyclical. This suggests that...

Recessions tend to be supply driven.

By assuming that the substitution effect is greater than the income effect we...

Restrict the set of utility functions that can be used in our model.

In response to an increase in the lump-sum tax T, the labor supply curve shift...

Right

the whole consumer decision problem describes...

The consumer's ultimate choice

"When wages increase, people may want to work less hours because they get richer and may choose to enjoy more of the things they like, including leisure." this statement provides an intuitive interpretation of

The income effect

"When wages increase, people may want to work more hours because they want to take advantage of the activity that pays off more." this statement provides an intuitive interpretation of

The substitution effect

An increase in energy price may lead to a recession because it discourages the demand for non-energy goods. True or False

True

Understanding how changes in wage w affect the consumer's optimal labor choice N* allows to...

Understand whether the labor supply curve is upward-sloping or downward-sloping

Understanding how the changes in pi-T (dividends net of tax) affect the consumer's optimal choice of labor N* allows to

Understand whether the labor supply curve shifts left or right in response to changes in pi-T

To understand whether the consumer's optimal choice of labor N* increases or decreases in response to an increase in pi-T, we need to know...

Whether leisure L is normal of inferior.

Suppose the economy exhibits three consecutive quarters of negative real per capita GDP growth. Would the policymakers say that the economy is in recession? yes or no.

Yes

Why does the budget line have a kink?

because leisure L cannot exceed available hours h

To help the economy recover in a recession, the government may...

cut taxes, increase money supply, and subsidize consumption.

The variables that the consumer can control are called...

endogenous

The variables that the consumer cannot directly choose are called...

exogenous

Over the budget line...

infeasible

On the budget line...

may be optimal

Which of the assumptions about the consumers' preferences guarantees that the indifferent curves are convex?

preference for diversity

A Utility function describes...

preferences

Suppose that inflation is negatively correlated with unemployment, while unemployment is negatively correlated with GDP. This implies that, most likely, inflation is.. 1. procyclical 2. countercyclical 3. acyclical 4. none of the above

procyclical

If I were to choose between two policies that have different macroeconomic outcomes, I would pick the one that...

results in higher consumers' utility

What variables are exogenous(parameters) in the consumer decision problem?

w h pi T

The slope of the budget line is...

wh/h and w