ECON 362 Midterm 2 MC Questions

According to the classical theory of money, inflation does not make workers poorer because wages increase: a) in real terms during periods of inflation. b) faster than the overall price level. c) more slowly than the overall price level. d) in proportion to the increase in the overall price level.

d

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate implied by the Fisher equation: a) remains constant. b) decreases by 1 percent. c) increases by 2 percent. d) increases by 1 percent.

d

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent. a) 4 b) 3 c) 1 d) 7

d

Sectoral shifts: a) lead to wage rigidity. b) explain the payment of efficiency wages. c) depend on the level of the minimum wage. d) make frictional unemployment inevitable.

d

When a person purchases a 90-day Treasury bill, he or she cannot know the: a) nominal interest rate. b) ex ante real interest rate. c) expected rate of inflation. d) ex post real interest rate.

d

When f (k) is drawn on a graph with increases in k noted along the horizontal axis, the slope of the curve denotes: a) the marginal product of labor. b) output per unit of capital. c) output per worker. d) the marginal product of capital.

d

In all the versions of the Solow model we considered, the economy always converges to the steady state. Which feature is responsible for this result? A. There is no government B. Constant returns to scale C. The law of diminishing returns D. Population grows

C) law of diminishing returns

Efficiency-wage theories suggest that a firm may pay workers more than the market-clearing wage for all of the following reasons except to: a) increase worker effort. b) improve the quality of the firm's labor force. c) reduce the firm's wage bill. d) reduce labor turnover.

c

Equilibrium in the market for goods and services determines the ______ interest rate, and the expected rate of inflation determines the ______ interest rate. a) ex post real; ex post nominal b) ex post nominal; ex post real c) ex ante real; ex ante nominal d) ex ante nominal; ex post real

c

Given that M / P = kY, when the demand for money parameter, k, is large, the velocity of money is ______, and money is changing hands ______. a) small; frequently b) large; infrequently c) small; infrequently d) large; frequently

c

If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage: a) increased 4 percent. b) decreased 6 percent. c) decreased 2 percent. d) increased 2 percent.

c

If nominal wages cannot be cut, then the only way to reduce real wages is by: a) productivity increases. b) unions. c) adjustments via inflation. d) legislation.

c

If the Fed announces that it will raise the money supply in the future but does not change the money supply today, a) both the nominal interest rate and the current price level will decrease. b) the nominal interest rate will increase and the current price level will decrease. c) both the nominal interest rate and the current price level will increase. d) the nominal interest rate will decrease and the current price level will increase.

c

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: a) 200,000. b) 10. c) 20,000. d) 2,000,000.

c

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be ______ percent. a) 9 b) 11 c) 3 d) 4

c

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 capital per worker is: a) 9. b) 1. c) 4. d) 2.

c

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is ______ times per year. a) 0.2 b) 10 c) 5 d) 2

c

In the Solow growth model, for any given capital stock, the ______ determines how much output the economy produces, and the ______ determines the allocation of output between consumption and investment. a) population growth rate; saving rate b) saving rate; production function c) production function; saving rate d) depreciation rate; population growth rate

c

In the Solow growth model, where s is the saving rate, y is output per worker, and i is investment per worker, consumption per worker (c) equals: a) sy b) (1 - s) y - i c) (1 - s) y d) (1 + s) y

c

Each month, - 1% of employed workers lose their jobs (s = 0.01) - 19% of unemployed workers find jobs (f = 0.19) • What is the natural rate of unemployment?

0.05 U/L = s/s+f = .01/.01+.19 = .05

Suppose V is constant, M is growing 5% per year, Y is growing 2% per year, and r = 4%. Suppose the growth rate of Y falls to 1% per year. What is the change in π?

1

Suppose V is constant, M is growing 5% per year, Y is growing 2% per year, and r = 4%. What is nominal interest rate, i?

7

At the start of 2019, there was $1000 worth of capital. • Suppose total gross investment was $200 in 2019. • 10% of capital wore out (depreciated) in 2019. • What is ΔK?

100 Depreciation = $1000 x 10% = $100 • Capital at the end of 2019: $1000 + $200 - $100 = $1100 • Using notations: K t+1 = K t + I t − δK t • New capital = old capital + investment - depreciation

Suppose V is constant, M is growing 5% per year, Y is growing 2% per year, and r = 4%. If the Fed increases the money growth rate by 2 percentage points per year, what is Δi?

2

Suppose V is constant, M is growing 5% per year, Y is growing 2% per year. Then, inflation rate must be ____ %.

3

Suppose M is growing 5% per year, Y is growing 2% per year. But V is now increasing at a rate of 2%. Then, inflation rate must be ____ %.

5

According to the Culture explanation of income disparity, Haitian farmers save little because A. Historically, the abundance of fruits all year round made it not necessary to save, and it has become a tradition. B. It is a rational behavior, because the potential profit from saving and investment will be extracted by local powerful people anyway. C. The climate is too hostile for investment activities to succeed.

A

According to the Geography explanation of income disparity, why are tropical countries poor? A. Diseases and low productivity B. Diseases and a tradition of being easy C. The exploitation by European colonists left limited resources to the local people.

A

Other things equal, if a country's saving rate rises, what happens? A. The economy's income per capita will be higher in the long run B. The economy's income per capita will be higher temporarily, but remain the same in the long run

A

What should the Fed do if it wishes to reduce money supply A. Sell bonds in the open market B. Buy bonds in the open market

A

On the horizontal axis, pick a value greater than k* for the economy's initial capital stock. Label it k1 Over time, does k move towards the steady state or away from it? A) move toward it B) move away from it

A) move toward it

According to the Solow model, higher saving leads to higher capital and higher GDP per person. Therefore, in general, the higher the saving rate, the better-off a country's standard of living is in the long run. A) true B) false

A) true

According to the Institutions explanation of income disparity, Haitian farmers do not save much because A. Historically, the abundance of fruit all year round made it not necessary to save, and it has become a tradition. B. It is a rational behavior, because the potential profit from saving and investment will be extracted by local powerful people anyway. C. The climate is too hostile for investment activities to succeed.

B

Consider the Cobb-Douglas production function Y = AKα(EL)^1−α • Output per effective worker y = f(k) = ? A) y = Ak1−α B) y = Akα C) y = A1−αkα D) y = Aαk1−α

B

Does an economy's capital per person always converge to the golden rule? A. Yes B. No

B

In the steady state, income per person stops growing. A. True B. False

B

Other things equal, if a country's saving rate rises, what happens? A. The economy's growth rate will be higher in the long run B. The economy's growth rate will be higher temporarily, but remain the same in the long run.

B

Suppose V is constant, M is growing 5% per year, Y is growing 2% per year, and r = 4%. Suppose the growth rate of Y falls to 1% per year. What must the Fed do it if it wishes to keep π constant? A. increase money growth by 1% B. decrease money growth by 1%

B

In the United States, MPK − δ = 0.08 > 0.03 = n + g • Are we saving too much or too little, compared with the golden rule level of saving? A. Too much B. Too little

B) too little

According to the Institutions view, countries with authoritarian regimes such as China A. do not grow fast B. should grow fast C. can have growth bursts, but in the long run, they won't prosper

C

Other things equal, if a country's saving rate rises, what happens? A. The economy's standard of living will be higher in the long run B. The economy's standard of living will be higher temporarily, but remain the same in the long run. C. The economy's standard of living may go up or down, depending on other factors.

C

Capacity of tank: 100 gallons • Inflow: 4 gallons per minute • Outflow: 10% per minute • Question: how many minutes will it take for the tub to overflow?

Will never overflow Outflow is greater than inflow

Capacity of tank: 100 gallons. Inflow: 4 gallons per minute. Outflow: 10% per minute • Question: will the water level ever stabilize? A. Yes B. No

Yes

1896 - 1910, new gold was discovered in Alaska, Australia, and South Africa. What does the theory predict? A. price increases B. price decreases

a

A policy that increases the job-finding rate _____ the natural rate of unemployment. a) will decrease b) could either increase or decrease c) will not change d) will increase

a

All of the following are reasons for frictional unemployment except: a) unemployed workers accept the first job offer that they receive. b) the flow of information is imperfect. c) workers have different preferences and abilities. d) geographic mobility takes time.

a

Any policy aimed at lowering the natural rate of unemployment must either ______ the rate of job separation or ______ the rate of job finding. a) reduce; increase b) increase; reduce c) reduce; reduce d) increase; increase

a

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the labor market were always in equilibrium, this would lead to: a) a lower real wage and no change in unemployment. b) a lower real wage and a rise in unemployment. c) no change in real wage or in unemployment. d) a lower real wage and less unemployment.

a

Barnes & Noble switches to an ebook-focused business model. They close some stores and lay off workers. What type of unemployment is this? A. frictional B. structural C. cyclical

a

Britney works for Coca Cola. • Which company's stocks have a higher risk for Britney? A. Coca Cola's stocks B. Pepsi's stocks

a

Dave wants to be an accountant, but there is no accountant positions in this area. What type of unemployment is this? A. frictional B. structural C. cyclical

a

How do people behave if the inflation rate is 1,000,000%? (Venezuela, 2018) • What happens to the velocity of money? A. It increases B. It decreases C. It is not affected — a constant

a

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level. a) decrease; increase b) increase; decrease c) increase; increase d) decrease; decrease

a

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is: a) -4 percent. b) 6 percent. c) -5 percent. d) 1 percent.

a

In the case of an unanticipated increase in inflation: a) creditors with an unindexed contract are hurt because they get less than they expected in real terms. b) debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms. c) creditors with an indexed contract gain because they get more than they contracted for in nominal terms. d) debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms.

a

In the model of the steady-state unemployment rate with a fixed labor force, the rate of job finding equals the percentage of the ______ who find a job each month, while the rate of job separation equals the percentage of the ______ who lose their job each month. a) unemployed; employed b) labor force; labor force c) labor force; unemployed d) employed; labor force

a

Short-term unemployment is most likely to be ______ unemployment, while long-term unemployment is mostly likely to be _____ unemployment. a) frictional; structural b) structural; frictional c) the natural rate of; frictional d) structural; the natural rate of

a

The costs of reprinting catalogs and price lists because of inflation are called: a) menu costs. b) fixed costs. c) variable yardstick costs. d) shoeleather costs.

a

The costs of unexpected inflation, but not of expected inflation, are: a) the arbitrary redistribution of wealth between debtors and creditors. b) the costs of relative price variability. c) unintended distortions of individual tax liabilities. d) menu costs.

a

The inconvenience associated with reducing money holdings to avoid the inflation tax is called: a) shoeleather costs. b) fixed costs. c) menu costs. d) variable yardstick costs.

a

The quantity theory of money assumes that: a) velocity is constant. b) income is constant. c) the money supply is constant. d) prices are constant.

a

What happens to the labor demand curve if there is an increase in investment and therefore more capital goods? A. It increases B. It decreases C. It does not move because it is a function of effort

a

Which of the following is an example of frictional unemployment? a) Dave searches for a new job after voluntarily moving to San Diego. b) Bill is qualified and would like to be an airline pilot, but airlines do not find it profitable to hire him at the wage established by the airline pilots' union. c) Elaine is willing to work for less than the minimum wage, but employers cannot hire her for less than the minimum wage. d) Joan is willing to work for less than the going wage, but there are no jobs available.

a

Which type of steady state is in the Solow model? A. Stable B. Unstable

a) stable

A rate of inflation that exceeds 50 percent per month is typically referred to as a: a) disinflation. b) deflation. c) hyperinflation. d) conflagration.

c

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the real wage were rigid, this would lead to: a) no change in the real wage and no change in unemployment. b) a decrease in the real wage. c) no change in the real wage and a rise in unemployment. d) no change in the real wage and a fall in unemployment.

c

1860-1896 economy grew but the supply of gold was relatively constant. What does the theory predict? A. price increases B. price decreases

b

Exhibit: Output, Consumption, and Investment Graph on HW 6B In this graph, when the capital stock per worker is OA, AB represents: a) consumption per worker, and AC represents investment per worker. b) investment per worker, and BC represents consumption per worker. c) investment per worker, and AC represents consumption per worker. d) consumption per worker, and BC represents investment per worker.

b

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in: a) inflation of 1 percent and the nominal interest rate of less than 1 percent. b) inflation of 1 percent and the nominal interest rate of 1 percent. c) both inflation and the nominal interest rate of less than 1 percent. d) inflation of 1 percent and the nominal interest rate of more than 1 percent.

b

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: a) 0.02. b) 0.18. c) 0.10. d) 0.08.

b

Stock A and B both have a long run average return of 7.5%. But stock A's return is more likely to go up and down with the market, while stock B's return is quite stable over the business cycle. • Which stock is more desirable? A. Stock A B. Stock B

b

Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. The production functions in both economies exhibit diminishing marginal product of capital. An extra unit of capital per worker increases output per worker: a) in Highland but not in Lowland. b) more in Lowland. c) by the same amount in Highland and Lowland. d) more in Highland.

b

Unemployment in the auto industry, where unions have relatively strong power. What type of unemployment is this? A. frictional B. structural C. cyclical

b

When the unemployment rate is at a steady state: a) the number of people finding jobs exceeds the number of people losing jobs. b) the number of people finding jobs equals the number of people losing jobs. c) the number of people losing jobs exceeds the number of people finding jobs. d) no hiring or firings are occurring.

b

Consider the Cobb-Douglas production function Y = AKαL1−α • Per capita output y = f(k) = ? y = Ak1−α y = Ak^α y = A^1−α k^α y = A^α k^1−α

b slide 29 oct 21

Capacity of tank: 100 gallons. Inflow: 4 gallons per minute. Outflow: 10% per minute • When the water level stabilizes, how much water is in the tank? A. 80 gallons B. 40 gallons C. 20 gallons D. 10 gallons

b) 40 gallons

In the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then ______ determines real GDP and ______ determines nominal GDP. a) velocity; the money supply b) the money supply; velocity c) the productive capability of the economy; the money supply d) the money supply; the productive capability of the economy

c

Teachers are laid off because the state government has little revenue in an economic downturn. What type of unemployment is this? A. frictional B. structural C. cyclical

c

The characteristic of the classical model that the money supply does not affect real variables is called: a) monetary policy. b) the monetary basis. c) monetary neutrality. d) the quantity theory of money.

c

The opportunity cost of holding money is the: a) prevailing Treasury bill rate. b) federal funds rate. c) nominal interest rate. d) real interest rate.

c

The real return on holding money is a) the inflation rate. b) minus the real interest rate. c) minus the inflation rate. d) the real interest rate.

c

Which of the following is the best example of structural unemployment? a) Tim is looking for a job with flexible hours but has not been offered one yet. b) Vickie lost her job as a graphic artist at a movie studio because she did not have training in computer-generated animation. c) Fatima lost her job at a packing plant but has not looked very intensively for a new job because she still has two months of unemployment insurance benefits left. d) Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available.

d

______ cause(s) the capital stock to rise, while ______ cause(s) the capital stock to fall. a) Interest rates; the discount rate b) Inflation; deflation c) International trade; depressions d) Investment; depreciation

d

What we have derived was the golden rule condition when there is no population growth. • Derive the golden rule condition for a Solow economy that has population growth.

mpk = n + delta