ECO 3203 Midterm 2
1. In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows at a 3 percent rate, then in the steady state, total output grows at a percent rate.
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________cause(s) the capital stock to rise, while _______ cause(s) the capital stock to fall
Investment; depreciation
______cause(s) the capital stock to rise, while ______ cause(s) the capital stock to fall
Investment; depreciation
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
Short-run fluctuations in output and employment are called
business cycles
International differences in income per person in accounting terms must be attributed to differences in either and/or
factor accumulation; production efficiency
In the IS—LM model when taxation increases, in short-run equilibrium, the interest rate and output
falls,falls
The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth , and that creditors have a propensity to consume than debtors
from debtors to creditors; smaller
The efficiency of labor
includes the knowledge, health, and skills of labor
An explanation for the slope of the LM curve is that as:
income rises, money demand rises, and a higher interest rate is required.
If wage rigidity holds the real wage above the equilibrium level, an increase in the supply of labor will the number unemployed.
increase
An increase in investment demand for any given level of income and interest rates—due, for example, to more optimistic "animal spirits"—will, within the IS-LM framework, output and interest rates.
increase; raise
In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income
increases by more than 250
In the Keynesian-cross model a decrease in the interest rate planned investment spending and the equilibrium level of income.
increases; increases
Over the business cycle, investment spending _____ consumption spending.
is more volatile than
Over the business cycle, investment spending _______ consumption spending.
is more volatile than
The increase in income in response to a fiscal expansion in the IS—LM is:
less than in the Keynesian-cross model unless the LM curve is horizontal
In the Solow growth model of Chapter 8, investment equals
saving
A rise in the price of an asset above its fundamental value is called a(n):
speculative bubble
The Solow model predicts that two economies will converge if the economies start with the same
steady states
According to the Solow model, persistently rising living standards can only be explained by
technological progress
According to the Solow model, persistently rising living standards can only be explained by
technological progress.
In a steady state with population growth and technological progress
the capital and labor shares of income are constant
The interaction of the IS curve and the LM curve together determine:
the equilibrium level of the interest rate and output.
In the Solow model with technological progress, along the balanced growth path, by increasing the efficiency of labor at rate g:
the real wage grows at rate g but the real rental price of capital is constant
(Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are
Y2 and PE2
According to classical theory, national income depends on , while Keynes proposed that determines the level of national income
aggregate supply; aggregate demand
A favorable supply shock occurs when:
an oil cartel breaks up and oil prices fall.
In the Keynesian-cross model fiscal policy has a multiplied effect on income because fiscal policy
changes income, which changes consumption, which further changes income
Purchasers of bonds issued by companies are ________ of the company, while purchasers of shares of stock issued by a company are________ of the company
creditors; partial owners
If the short-run IS—LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will , shifting the curve to the right and returning output to the natural level
decrease; LM
The effect of the financial crisis of 2008-2009 on the real economy in the United States was a(n) in aggregate demand, a(n) in output, and a(n) in the unemployment rate
decrease; decrease; increase
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
An increase in taxes shifts the IS curve
downward and to the left
If the saving rate increases, the
economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached
International differences in income per person in accounting terms must be attributed to differences in and/or
factor accumulation; production efficiency
When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is , and the aggregate demand curve shifts
lower; inward
Assume that 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 compared to the country with the lower population growth rate
lower; the same
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
An increase in the money supply
lowers the interest rate and increases income in the short run but leaves both unchanged in the long run
In the Solow model with technological progress, the steady-state growth rate of total output is
n + g
The theory of liquidity preference states that the quantity of real money balances demanded is
negatively related to the interest rate and positively related to income
Starting from long-run equilibrium, an increase in aggregate demand increases in the short run, but only increases in the long
output; prices
In the Solow growth model of Chapter 8, for any given capital stock, the ______ determines how much output the economy produces and the ________ determines the allocation of output between consumption and investment
production function; saving rate
For any given interest rate and price level an increase in the money supply:
raises income
Monetary neutrality, the irrelevance of the money supply in determining values of variables, is generally thought to be a property of the economy in the long
real
In the Solow growth model of Chapter 8, the economy ends up with a steady-state level of capital
regardless of the starting level of capital
All of the following are reasons for frictional unemployment except
unemployed workers accept the first job offer that they receive
The housing price boom prior to the 2008-2009 recession was fueled by all of the following except
unusually large increases in building material costs
A policy that increases the job-finding rate the natural rate of unemployment
will decrease