Econ final multiple choice

A liquidity trap occurs when

any additions to the monetary base are held as cash by people or reserves at banks.

Under monetary neutrality, an increase in the money supply causes output to _____ and the price level to ____

not change; rise

To what extent are homemaking and child-rearing accounted for in the governments GDP accounts?

only to the extent that they are provided for pay

Since the 1930s, the Fed's most important tool for controlling the money supply has been

open market operations

In the Keynesian model in the short run, the amount of employment is determined by the effective labor demand curve and the level of

output

In the Solow growth model, the steady state level of output per worker would increase if there were either a ____ in the saving rate or a ____ in the depreciation rate

rise; fall

In the long run, an increase in productivity would cause output to ____ and the aggregate price level to ____

rise; fall

A decrease in population growth will lead to a ____ in the steady state capital labor ration and a _____ in output per worker

rise; rise

If the rate of depreciation increases, then user cost____ and the desired capital stock _____

rises; falls

The idea that saving equals investment in the Solow model means that a steady state can be reached only when

sf(k) = (n+d)k

An adverse supply shock would cause the FE line to

shift to the left

The classical approach to macroeconomics assumes that

wages and prices adjust quickly to balance quantities supplied and demanded in markets

John Maynard Keynes disagreed with the classical economists because he believed that

wages and prices adjust slowly

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment?

$1.5 million aka 3 mil - 10mil*0.15

Fred the farmer purchased five new tractors at $20,000 each. Fred sold his old tractors to other farmers for $50000. The net increase in GDP of these transactions was

$100,000

Sam's Semiconductors produces computer chips, which it sells for $10 million to CCC. CCC's computers are sold for a total of $16 million. What is the value added of CCC?

$6 million

The growth accounting equation is

(know this) it has the plus signs

With no inflation and a nominal interest rate(i) of 0.25, a person can trade off one unit of current consumption for ____ units of future consumption

1.025

With a nominal interest rate of 4%, an expected inflation rate of 1%, and interest income taxed at a rate of 25%, what is expected real after-tax interest rate?

2% (r = i(1-t) - π = 4*0.75-1 = 3-1 = 2%)

Suppose the current level of output is 5000 and the elasticity of output with respect to capital is 0.4. A 10% increase in capital would increase the current level of output to

5200 = 5000+(5000*.04)

If C=400 I=100 G=50 NX=30 NFP=5 how much is GDP?

580

If a city has 4000 unemployed people and 60000 employed people then the city's unemployment rate equals

6.25% = 4000/(60000+4000)

12) Because of price stickiness in the Keynesian model, a decline in investment demand will not cause the A) LM curve to shift down and to the right in the short run. B) LM curve to shift in the long run. C) IS curve to shift down and to the left in the short run. D) IS curve to shift in the long run.

A. LM curve to shift down and to the right in the short run

People increase their labor supply in response to a temporary increase in government purchases because A) current or future taxes will increase, making them financially worse off. B) they need to work more to keep up with their neighbors. C) interest rates will rise, causing a substitution effect. D) higher spending today will lead to higher spending in the future, as well.

A. current or future taxes will increase, making them financially worse off

Which of the following is most likely to lead to an increase of 1% in the nominal demand for money?

An increase of 1% in the price level

A decline in the stock market, which makes consumers poorer, would cause (a) the aggregate demand curve to shift to the right. (b) the aggregate demand curve to shift to the left. (c) a movement down and to the right along the aggregate demand curve. (d) a movement up and to the left along the aggregate demand curve.

B. the aggregate demand curve to shift to the left

According to the efficiency wage model, during a recession, firms will not reduce real wages because (a) unions would go on strike, reducing profitability. (b) this would reduce worker effort and productivity. (c) the equilibrium real wage has increased. (d) legally, they can't.

B. this would reduce worker effort and productivity

In the Keynesian model, the difference between no intervention by the government during a recession and intervention using expansionary monetary or fiscal policy is that no intervention will return the economy to its equilibrium level of output (a) faster than intervention will and at a lower price level. (b) slower than intervention will and at a higher price level. (c) slower than intervention will and at a lower price level. (d) faster than intervention will and at a higher price level.

C. slower than intervention will and at a lower price

When a person receives an increase in wealth, what is likely to happen to consumption and saving?

Consumption increases and saving decreases

Total factor productivity growth is that part of economic growth due to (a) capital growth plus labor growth. (b) capital growth less labor growth. (c) capital growth times labor growth. (d) neither capital growth nor labor growth.

D. neither capital growth nor labor growth

In the Keynesian model, money is (a) neutral in both the short run and the long run. (b) neutral in neither the short run nor the long run. (c) neutral in the short run, but not in the long run. (d) neutral in the long run, but not in the short run.

D. neutral in the long run, but not in the short run

A problem with the use of aggregate demand management to stabilize the business cycle is that (a) monetary policy isn't available to use when interest rates are already rising because of higher inflation. (b) fiscal policy takes a long time to have any impact on the economy. (c) monetary policy is difficult to use, because the decision-making process is long and complicated. (d) the precise amount that output will change in response to monetary or fiscal policy isn't known.

D. the precise amount that output will change in response to monetary or fiscal policy isn't known

One reason that forms hire labor at the point where w = MPN is

If w > MPN, the cost of hiring additional workers exceeds the benefits(MPN) of hiring them, so they should hire fewer workers.

Suppose your bank raises its minimum balance requirement for free checking on checking accounts by $500. You take $500 out of your passbook savings account and put it in your checking account. What is the effect of M1 and M2?

M1 rises by $500, M2 is unchanged

Monetarists suggest doing which of the following?

Maintain a steady growth rate of the money supply.

Last year, Linus earned a salary of $25000, and he spent $24000, this saving $1000. At the end of the year, he received a bonus of $1000 and he sent $500 of it, saving the other $500. What was his marginal propensity to consume?

Marginal Propensity to consume = Change in Consumption/Change in Income = 500/1000 = 0.5

If Y=A*N*(75+K/N), where K=1000, n=20, a=10, what happens if K and N double?

Y doubles

Which of the following equations is most likely to represent short run aggregate supply according to the misperceptions theory

Y=6000+50(p-p^e)

When aggregate economic activity is declining, the economy is said to be in

a contraction

According to Keynesians, the primary source of business cycle fluctuations is

aggregate demand shocks

If a local government collects taxes of $250,000, has $175,000 of government consumption expenditures, makes transfer payments of $75,000, and has no interest payments or investment, its budget would

be in balance with neither a surplus nor deficit

Cyclical unemployment is caused by

business cycle fluctuations

According to classical economists, in recessions, the government should Select one: A. increase the minimum wage so that poor people will be able to afford necessities. B. actively use fiscal policy to combat the recession. C. eliminate barriers to labor market adjustment, such as burdensome regulations on businesses. D. stimulate the economy to increase demand.

c. eliminate barriers to labor market adjustment, such as burdensome regulations on businesses

To ensure that the fundamental identity of national income accounting holds, changes in inventories are

counted as investment

The degree to which the public believes the central bank's announcements about future policy is its

credibility

change in government regulations affecting production, a spell of unusually good or bad weather, the introduction of new management techniques

examples of productivity shock

A rise in the price of a bond causes the yield of the bond to

fall

An increase in the money supply causes the real interest rate to ___ and output to ___ in the short run, before prices adjust to restore equilibrium

fall; rise

The substitution effect of a rise in the real interest rate on saving implies that a rise in the real interest rate leads to a ____ in consumption and a _____ on saving, for someone who's a lender.

fall; rise

When U.S. banks borrow from one another, they must pay the

fed funds rate

Saving is a ____ variable, and wealth is a _____ variable

flow; stock

The equilibrium level of employment, achieved after the complete adjustment of wages and prices, is known as the

full-employment level of employment

Suppose the government decided to tighten monetary policy and decrease government expenditures. In the short run in the Keynesian model, the effect of these policies would be to_____ the real interest rate and _____ the level of output

have an ambiguous effect on; decrease

Keynesians are skeptical of the classical theory that recessions are periods of increased mismatch between workers and jobs because

help-wanted advertising falls during recessions

The least liquid asset on this list is: stocks, money, bonds, houses

houses

What are these things examples of? improvements in the health of labor force, increase in job skills in the labor force, increases in the educational achievements of the population

human capital formation

The classical IS-LM/AD-AS model, a beneficial productivity shock would _____ output, _____ the real interest rate, and _____ the price level.

increase decrease decrease

In the Keynesian model, suppose the Fed sets a target for the money supply. If the IS curve shifts to the left, and the Fed wants to keep output unchanged, what should the Fed do?

increase the money supply

Any change that reduces desired saving relative to desired investment (for a given level of output) causes the real interest rate to ____ and shifts the IS curve____

increase; to the right

If you expect a general price increase of 5% this year and the price of the hamburgers you sell increases by 10%, you would conclude that the relative price of your good has

increased, and you would increase your output

Suppose there was a banking crisis. The money supply would shrink by the greatest amount if the public ________ their currency-deposit ratio and the banks ________ their reserve-deposit ratio.

increased; increased

Policymakers may be uncertain about the state of the economy because

initial releases of data may be less accurate than later data releases.

A variable that tends to move in advance of aggregate economic activity is called

leading

A change that increases real money demand relative to the real money supply causes the LM curve to shit to the

left

A decrease in consumer confidence shifts the AD curve to the

left

An increase in firms' costs shifts the SRAS curve to the

left

The theory that firms will be slow to change their products' prices in response to changes in demand because there are costs to changing prices is called

menu cost theory

Keynesian economists believe that in the short run

money neutrality does not exist and prices do not adjust rapidly

Assuming money neutrality in the classic model, a 10% increase in the nominal money supply would cause

no change in the real money supply

Zero lower bound refers to the fact that

nominal interest rates cannot fall below zero

According to Keynesians, the primary reason money is not neutral is

price stickiness

A economic variable that moves in the same direction as aggregate economic activity (up in expansions, down in contractions) is called

procyclical

According to classical macroeconomists, prices adjust ____ to shocks, so the government should ____

rapidly; do little

The FE line is vertical because the level of output at full employment doesn't depend on the

real interest rate

The LM curve illustrates that when income increases, the

real interest rate on non monetary assets must increase to clear the asset market

An increase in money supply would cause the iS curve to

remain unchanged

An increase in the money supply cause the FE line to

remain unchanged

Milton Friedman would eliminate the destabilizing effect of the Federal Reserve's monetary policy by

requiring that the Federal Reserve choose a monetary aggregate and increase it at a fixed percentage rate each year.

The idea that expected future increases in output cause increases in the current money supply and that expected future decreases in output cause decreases in the current money supply, rather than the other way around, is known as

reverse causation

An inventions that raises the future marginal product of capital ( in a closed economy) would cause an increase in desired investment, which would cause the investment curve to shift to the ____ and would cause the real interest rate to ____

right; increase

You have just read that the Federal Reserve has increased the money supply to avoid a recession. For a given price level, you would expect the LM curve to

shift to the right as the real money supply rises

An increase in wealth that doesn't affect labor supply would cause the IS curve to ____ and the FE line to ____

shift up and right; be unchanged

Suppose the intersection of the IS and LM curves is to the right of the FE line. An increase in the price level would most likely eliminate a disequilibrium among the asset, labor, and goods market by

shifting the LM curve to the left

Classical economists think that the government _____ use fiscal policy to dampen the business cycle because prices and wages adjust ____

should not, rapidly

Assumptions for economic theories and models should be

simple and reasonable rather than complex

If producers have imperfect information about the general price level and sometimes misinterpret changes in the general price level as changes in relative prices, then the SRAS curve

slopes upward

According to Keynesian macroeconomists, prices adjust ____ to shocks, so the government should ____

slowly; fight recessions

Changes in the capital stock occur ____, and changes in the amount of labor that firms employ occur_____

slowly; quickly

The tendency of workers to supply more labor in response to a larger reward for working is called the ____ of a higher real wage on the quantity of labor supplied

substitution effect

According to the misperceptions theory, if the fed wants to use monetary policy to influence the real economy it would have to

surprise the public with unexpected changes in monetary policy

The opportunity cost of holding currency decreases when

the interest rate on bonds decreases

The Fed can reduce the money supply by reducing

the monetary base

Real business cycle theorists think that most business cycle fluctuations are caused by shocks to

the production function

The currency—deposit ratio is determined by

the public

In the Keynesian model, suppose the Fed sets a target for the real interest rate. If the IS curve shifts to the left, and the Fed wants to keep output unchanged

the real interest rate will decrease

In the Keynesian model, suppose the Fed wants to keep output unchanged. If the IS curve shifts to the left, and the Fed acts to keep output unchanged, then

the real interest rate will decrease

The fact that the production function relating output to capital becomes flatter as we move from left to right means that

there is diminishing marginal productivity of capital

Economists use the term shocks to mean

typically unpredictable forces that have major impacts on the economy

The Phillips curve is negative empirical relationship between

unemployment and inflation

A favorable supply shock would shift the production function ___ and ____ marginal productivity at every level of employment

up; increase