Final Test Study Guide

Assume that the money demand function is (M / P)d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

1,600.

Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2 and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be:

r2, Y3.

Balanced growth refers to the property where:

values of many variables within a country rise together in the steady state.

Measures of average workweeks and building permits for new housing units are included in the index of leading indicators, because shorter workweeks tend to indicate _____ future economic activity and increased permits for new units tend to indicate _____ future economic activity.

weaker; stronger

If the production function is y = k^1/2, the steady-state value of y in the Solow model with population growth and technological progress is:

y = s / (𝛿δ + n + g).

If the contribution of capital to growth in output is 1.5 percent, the contribution of labor is 0.5 percent, and the Solow residual growth is equal to 1 percent, then total output must be growing at:

3 percent.

When capital increases by ΔK units, output increases by:

MPK × ΔK units.

Which one of these is a reason why many economists are skeptical about industrial policies?

Measuring externalities from different sectors is quite hard.

Based on the graph, which is the correct ordering of the price levels and money supplies?

P1 > P2 and M1 < M2

In the Keynesian-cross model, if the MPC equals 0.75, then a $3 billion decrease in taxes increases planned expenditures by _____ and increases the equilibrium level of income by _____.

$2.25 billion; $9 billion

In the Solow model with technological progress, the steady-state growth rate of capital per effective worker is:

0.

Assume that an economy described by the Solow model is in a steady state with output and capital growing at 3 percent and labor growing at 1 percent. The capital share is 0.3. The growth-accounting equation indicates that the contributions to growth of capital, labor, and total factor productivity are:

0.9 percent, 0.7 percent, and 1.4 percent, respectively.

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:

100

The total capital stock of an economy increases by 10 units and the total labor increases by 50 units. The marginal product of capital and labor are 50 and 10, respectively. If there is no TFP growth, the total output will increase by _____ units.

1000

The recent worldwide slowdown in economic growth began in the early:

1970s.

Suppose an economy has 100 units of capital, 100 units of labor, and the efficiency of each worker is equal to 2. The effective number of workers for this economy is _____ and the capital per effective worker is _____.

200; 1/2

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.

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by:

500.

If the production function is Y = AK2/3L1/3 in the land of Antegria, and the labor force increases by 3 percent, capital stock increases by 3 percent, and TFP grows by 3 percent, then the total output growth is _____ percent.

6

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

70

Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point:

A

Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at _____, with a _____ price level.

C; higher

In the Keynesian-cross model, actual expenditures equal:

GDP.

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the _____ curve to the _____.

IS; left

A tax cut shifts the _____ curve to the right, and the aggregate demand curve _____.

IS; shifts to the right

Which of these policies of the government is NOT designed to increase resources devoted to research and development?

Increasing the amount people can put in tax-exempt retirement accounts.

If Y is output, K is capital, u is the fraction of the labor force in universities, L is labor, E is the stock of knowledge, and the production Y = F (K, (1 - u) EL) exhibits constant returns to scale, then output (Y) will double if:

K and E are doubled.

Which of these statements is NOT true about the creation of knowledge and the process of research and development?

Knowledge is a private good, that is, rival and excludable.

One of the main hypotheses of the real business cycle theory is that recessions are caused by:

adverse technology shocks.

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:

both Central Bank A and Central Bank B should increase the quantity of money.

The IS and LM curves together generally determine:

both income and the interest rate.

Based on the graph, if the interest rate is r3, then people will _____ bonds, and the interest rate will _____.

buy; rise

In the Solow growth model with population growth but no technological progress, the steady-state amount of investment can be thought of as a break-even amount of investment because the quantity of investment just equals the amount of:

capital needed to replace depreciated capital and to equip new workers.

The economic response to the overnight reduction in the French money supply by 20 percent in 1724:

confirmed that money is not neutral in the short run because both output and prices dropped.

Labor hoarding refers to:

continuing to employ workers during a recession to ensure they will be available in the recovery.

In the two-sector endogenous growth model, income growth persists because the:

creation of knowledge in universities never slows down.

The version of Okun's law studied in Chapter 11 assumes that with no change in unemployment, real gross domestic product (GDP) normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would:

decrease by 1 percent.

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ΔT will:

decrease equilibrium income by ΔΔT (MPC) / (1 - MPC).

In the Solow model with population growth and no technological progress, an increase in the population growth rate leads to a(n) _____ in the effective investment rate leading to a(n) _____ in the steady-state income per worker.

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

If the government's tax revenue is less than what it spends, then the government runs a budget _____, which represents _____ public saving.

deficit; negative

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.

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

demand for real balances per unit of output.

The efficiency of labor:

depends on the knowledge, health, and skills of labor.

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 these EXCEPT:

equal the marginal productivity of capital (MPK).

Other things equal, a given change in government spending has a larger effect on demand the:

flatter the LM curve.

Analysis of population growth around the world concludes that countries with high population growth tend to:

have a lower level of income per worker than countries with low population growth.

A study by economists on the relationship between firm management and productivity concludes that well-managed firms have all of these features EXCEPT:

higher bankruptcy rates

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are _____, generating a _____ quantity of output demanded.

higher; greater

If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in _____ prices and _____ output in the short run.

higher; lower

Economic research shows that _____ in explaining international differences in living standards.

human capital is at least as important as physical capital

An increase in taxes lowers income:

in the short run but leaves it unchanged in the long run, while lowering consumption and increasing investment.

Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant, the Federal Reserve should _____ the money supply, shifting to _____.

increase; LM2

According to the theory of liquidity preference, decreasing the money supply will _____ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _____ nominal interest rates in the long run.

increase; decrease

Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) _____ in the money supply or a(n) _____ in velocity.

increase; increase

Since the Covid-19 health crisis caused many businesses to temporarily shut down and lay off their workers, there was a(n) _____ in the natural rate of unemployment and the long-run aggregate supply (LRAS) curve shifted _____.

increase; left

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.

Business cycles are:

irregular and unpredictable.

Over the business cycle, investment spending _____ consumption spending.

is more volatile than

A given increase in taxes shifts the IS curve more to the left the:

larger the marginal propensity to consume.

When firms experience unplanned inventory accumulation, they typically:

lay off workers and reduce production.

Using the aggregate demand-aggregate supply (AD-AS) model, the economic downturn caused by Covid-19 can be BEST described by a:

leftward shift of LRAS and leftward shift of AD.

If the Fed accommodates an adverse supply shock, output falls _____, and prices rise _____.

less; more

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, _____ output and _____ interest rates.

lower; raise

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a _____ real money supply M / P, which _____ the interest rate and _____ spending.

lower; raises; reduces

The total output of an economy grows at 4 percent and the depreciation rate is 3 percent. Further, the capital stock is 6 times one year's GDP and the capital income is 30 percent of GDP. In this case, we can conclude that the economy is operating at a level of capital _____ than the Golden Rule and _____ saving will lead to more consumption in the long run.

more; decreasing

In the Solow model with technological progress, the steady-state growth rate of total output is:

n + g.

Schumpeter's thesis of "creative destruction" is an explanation of economic progress resulting from:

new product producers driving incumbent producers out of business.

The IS-LM model is generally used:

only in the short run.

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change _____ in the short run and change _____ in the long run.

only output; only prices

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then:

output and employment will increase in the short run.

The balanced growth property of the Solow growth model with population growth and technological progress predicts which of these sets of variables will grow at the same rate in the steady state?

output per worker, capital per worker, real wage

In the short run, a favorable supply shock causes:

prices to fall and output to rise.

A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____.

prices; output

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income:

r2, Y3.

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in the money supply would generate the new equilibrium combination of interest rate and income:

r3, Y3.

Other things equal, an expected deflation can change demand by:

raising the real interest rate for any given nominal interest rate, thus reducing desired investment.

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations.

Economists who believe that monetary policy is more potent than fiscal policy argue that the:

responsiveness of money demand to the interest rate is small.

In this graph, if firms are producing at level Y3, then inventories will _____, inducing firms to _____ production.

rise; decrease

In a steady-state economy with a saving rate s, population growth n, depreciation rate 𝛿δ, and labor-augmenting technological progress g, the steady-state ratio of capital per effective worker (k*), in terms of output per effective worker (f (k*)), is

sf (k) / (𝛿δ + n + g).

The type of legal system and the level of corruption in a country have been found to be:

significant determinants of the rate of economic growth in a country.

The LM curve, in the usual case:

slopes up to the right.

If the interest rate is above the equilibrium value, the:

supply of real balances exceeds the demand.

Endogenous growth theory rejects the assumption of exogenous:

technological change.

According to the Solow model, persistently rising living standards can only be explained by:

technological progress.

Prescott interpreted fluctuations in the Solow residual as evidence that:

technology shocks are an important source of short-run economic fluctuations.

Along an IS curve all of these are always true EXCEPT:

the demand for real balances equals the supply of real balances.

The rate of labor-augmenting technological progress (g) is the growth rate of:

the efficiency of labor.

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

the government-spending multiplier is larger than the tax multiplier.

The LM curve shows combinations of _____ that are consistent with equilibrium in the market for real money balances.

the interest rate and the level of income

The IS curve shifts when any of the following economic variables change EXCEPT:

the interest rate.

If an economy is in a liquidity trap, then an expansionary monetary policy ends up increasing:

the liquidity of household portfolio.

In the Solow growth model with population growth but no technological progress, when the economy finds itself at the Golden Rule steady state, the marginal product of capital minus the rate of depreciation will equal:

the population growth rate.

In a steady state with population growth and technological progress:

the real rental price of capital is constant and the real wage grows at the rate of technological progress.

Conditional convergence occurs when economies converge to:

their own individual steady states.

According to the Kremerian model, large populations improve living standards because:

there are more people who can make discoveries and contribute to innovation.

Which of these statements is NOT true about the steady state in the Solow Model with population and technological progress:

total capital stock and total output grow at the rate of population growth.

The debt-deflation theory of the Great Depression suggests that an _____ deflation redistributes wealth in such a way as to _____ spending on goods and services.

unexpected; reduce

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

upward and to the left.