Intermediate Macro Economics

Economists use the term money to refer to:

A. income. B. profits. C. assets used for transactions. D. earnings from labor.

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals:

A. 0.6. B. 1.67. C. 2.0. D. 2.5.

Assume that equilibrium GDP (Y) is 5,000. Consumption (C). is given by the equation C = 500 + 0.6Y. No government exists. In this case, equilibrium investment is:

A. 1,500. B. 2,000. C. 2,500. D. 3,000.

In a closed economy, private saving equals:

A. Y - C - G. B. Y - T - C. C. Y - I - C. D. Y - T.

Empirical investigations into whether differences in income per person are the result of differences in the quantities of the factors of production available or differences in the efficiency with which the factors are employed typically find:

A. a negative correlation between the quantity of factors and the efficiency of use. B. a positive correlation between the quantity of factors and the efficiency of use. C. no correlation between the quantity of factors and the efficiency of use. D. large gaps between the quantity of factors accumulated and the efficiency of use.

In the Solow growth model, the assumption of constant returns to scale means that:

A. all economies have the same amount of capital per worker. B. the steady-state level of output is constant regardless of the number of workers. C. the saving rate equals the constant rate of depreciation. D. the number of workers in an economy does not affect the relationship between output per worker and capital per worker.

Unlike the real world, the classical model with fixed output assumes that:

A. all factors of production are fully utilized. B. all capital is fully utilized but some labor is unemployed. C. all labor is fully employed but some capital lies idle. D. some capital lies idle and some labor is unemployed.

In the Solow growth model, technological change is ______, whereas in endogenous growth theories, technological change is ______.

A. assumed; explained B. explained; assumed C. persistent; constant D. constant; persistent

If output is described by the production function Y = AK^0.2 L^0.8, then the production function has:

A. constant returns to scale. B. diminishing returns to scale. C. increasing returns to scale. D. a degree of returns to scale that cannot be determined from the information given.

In the Solow growth model, capital exhibits ______ returns. In the basic endogenous growth model, capital exhibits ______ returns.

A. constant; diminishing B. constant; constant C. diminishing; constant D. diminishing; diminishing

The money supply consists of:

A. currency plus reserves. B. currency plus the monetary base. C. currency plus demand deposits. D. the monetary base plus demand deposits.

Other things being equal, all of the following government policies are likely to increase national saving except:

A. decreasing taxes on savings accounts. B. running a budget deficit. C. running a budget surplus. D. retiring part of the national debt.

International differences in income per person in accounting terms must be attributed to differences in either ______ and/or ______.

A. factor accumulation; production efficiency B. constant returns to scale; the marginal product of capital C. unemployment rates; depreciation rates D. consumption; interest rates

In the long run, the level of national income in an economy is determined by its:

A. factors of production and production function. B. real and nominal interest rate. C. government budget surplus or deficit. D. rate of economic and accounting profit.

According to the classical theory of money, inflation does not make workers poorer because wages increase:

A. faster than the overall price level. B. more slowly than the overall price level. C. in proportion to the increase in the overall price level. D. in real terms during periods of inflation.

When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the:

A. graph is a straight line. B. slope of the line eventually gets flatter and flatter. C. slope of the line eventually becomes negative. D. slope of the line eventually becomes steeper and steeper.

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

A. have high income per worker. B. have a lower level of income per worker than other parts of the world. C. have the same standard of living as other parts of the world. D. tend to be the high-income-producing nations of the world.

The efficiency of labor is a term that does not reflect the:

A. high output that comes from labor cooperating with a large amount of capital. B. health of the labor force. C. education of the labor force. D. skills of the labor force acquired through on-the-job training.

In the classical model with fixed income, if the interest rate is too low, then investment is too ______ and the demand for output ______ the supply.

A. high; exceeds B. high; falls short of C. low; exceeds D. low; falls short of

Starting from a steady-state situation, if the saving rate increases, the rate of growth of capital per worker will:

A. increase and continue to increase unabated. B. increase until the new steady state is reached. C. decrease until the new steady state is reached. D. decrease and continue to decrease unabated.

If inflation is 6 percent and a worker receives a 4 percent wage increase, then the worker's real wage:

A. increased 4 percent. B. increased 2 percent. C. decreased 2 percent. D. decreased 6 percent.

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. inflation of 1 percent and the nominal interest rate of more than 1 percent. D. both inflation and the nominal interest rate of less than 1 percent.

The demand for the economy's output:

A. is always equal to the supply, regardless of the interest rate. B. may be computed provided that we know disposable income. C. is equal to consumption, investment, and government purchases. D. is determined by government purchases and taxes.

A competitive firm:

A. is small relative to the market in which it trades. B. has to charge a lower price when it wants to sell more goods. C. has several large competitors with whom it engages in fierce competition. D. can set the wage at which it hires workers.

If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then:

A. it cannot be determined whether the money supply increases or decreases. B. the money supply increases. C. the money supply decreases. D. the money supply does not change.

The right of seigniorage is the right to:

A. levy taxes on the public. B. borrow money from the public. C. draft citizens into the armed forces. D. print money.

A competitive, profit-maximizing firm hires labor until the:

A. marginal product of labor equals the wage. B. price of output multiplied by the marginal product of labor equals the wage. C. real wage equals the real rental price of capital. D. wage equals the rental price of capital.

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. more in Highland. B. more in Lowland. C. by the same amount in Highland and Lowland. D. in Highland, but not in Lowland.

In the Solow growth model of an economy with population growth but no technological change, if population grows at rate n, then capital grows at rate ______ and output grows at rate ______.

A. n; n B. n; 0 C. 0; 0 D. 0; n

The marginal propensity to consume is:

A. normally expected to be between zero and one. B. equal to consumption divided by disposable income. C. normally assumed to decrease as disposable income increases. D. normally assumed to increase as disposable income increases.

In the United States, the money supply is determined:

A. only by the Fed. B. only by the behavior of individuals who hold money and of banks in which money is held. C. jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held. D. according to a constant-growth-rate rule.

The marginal product of labor is:

A. output divided by labor input. B. additional output produced when one additional unit of labor is added. C. additional output produced when one additional unit of labor and one additional unit of capital are added. D. value of additional output when one dollar's worth of additional labor is added.

In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases:

A. output. B. velocity C. the nominal interest rate. D. the real interest rate.

The Solow growth model with population growth but no technological progress can explain:

A. persistent growth in output per worker. B. persistent growth in total output. C. persistent growth in consumption per worker. D. persistent growth in the saving rate.

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

A. physical capital is more important than human capital B. human capital is at least as important as physical capital C. human capital is much more important than physical capital D. infrastructure is the most important factor

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

A. population growth. B. capital accumulation. C. saving rates. D. technological progress.

Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate.

A. positively; positively B. positively; negatively C. negatively; negatively D. negatively; positively

Endogenous growth theory rejects the assumption of exogenous:

A. production functions. B. rates of depreciation. C. population growth rates. D. technological change.

The demand for output in a closed economy is the sum of:

A. public saving and private saving. B. the quantity of capital and labor and production technology. C. consumption, investment, and government spending. D. government purchases and transfer payments minus tax receipts.

Compared to periods of lower rates of inflation, during a hyperinflation all of the following occur except:

A. shoeleather costs increase. B. menu costs become larger. C. relative prices do a better job of reflecting true scarcity. D. tax distortions increase.

Public policies in the United States designed to stimulate technological progress do not include:

A. tax breaks to encourage homeownership. B. the temporary monopoly granted by the patent system. C. tax breaks for research and development. D. subsidies given by the National Science Foundation.

In the long run, what determines the level of total production of goods and services in an economy?

A. the interest rate and the amount of national saving B. the quantity of capital, quantity of labor, and production technology C. consumption, investment, and government spending D. the marginal products of capital and labor, constant returns to scale, and competition

In the basic endogenous growth model, income can grow forever—even without exogenous technological progress—because:

A. the saving rate equals the rate of depreciation. B. the saving rate exceeds the rate of depreciation. C. capital does not exhibit diminishing returns. D. capital exhibits diminishing returns.

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

A. unrelated to the rate of economic growth in a country. B. significant determinants of the rate of economic growth in a country. C. important topics for political discussion, but not economic explanations of growth. D. important variables explaining the Golden Rule level of capital.

One explanation for greater economic development in moderate versus tropical climates is that institutions established by colonial settlers in moderate climates ______, while institutions established by colonists in tropical climates ______.

A. were based on English common law; were based on the Napoleonic Code B. were based on the Napoleonic Code; were based on English common law C. protected property rights; were extractive and authoritarian D. were extractive and authoritarian; protected property rights

If two economies are identical (including having the same saving rates, population growth rates, and efficiency of labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy with the smaller capital stock:

A. will be at a lower level than in the steady state of the high capital economy. B. will be at a higher level than in the steady state of the high capital economy. C. will be at the same level as in the steady state of the high capital economy. D. will be proportional to the ratio of the capital stocks in the two economies.

What is the difference between convergence and conditional convergence with respect to predictions of the Solow growth model? Explain.

Convergence applies to economies with the same saving rate, population growth rate, depreciation rate, rate of technological progress, and production function. These economies will converge to the same steady state according to the Solow growth model, with the same level of output per worker, capital per worker, and growth rates (even if the levels were initially different). Conditional convergence applies to economies with different saving rates, population growth rates, depreciation rates, rates of technological progress, and/or production functions. These economies will move to different steady state equilibria with different levels of output per worker, capital per worker, and growth rates determined by the key variables.

Assume that the production function is given by Y = AK^0.5 L^0.5, where Y is GDP, K is capital stock, and L is labor. The parameter A is equal to 10. Assume also that capital is 100, labor is 400, and both capital and labor are paid for their marginal products. a. What is Y? b. What is the real wage of labor? c. What is the real rental price of capital (the amount of output paid per unit of capital)?

a) 10*10*20= 2000 b) 2000*.5/400= 2.5 c) 2000*.5/100= 10

Assume that the monetary base (B) is $100 billion, the reserve-deposit ratio (rr) is 0.1, and the currency-deposit ratio (cr) is 0.1. a. What is the money supply? b. If rr changes to 0.2, but cr is 0.1 and B is unchanged, what is the money supply? c. If rr is 0.1 and cr is 0.2, but B is unchanged, what is the money supply?

a) Using the formula, 100(1.1/.2)... money supply is $550 billion. b) 100(1.1/.3)...366.67 billion c) 100(1.2/.3) ...$400 billion.

Consider a production function for an economy: Y = 20(L^.5 K^.4 N^.1) where L is labor, K is capital, and N is land. In this economy the factors of production are in fixed supply with L = 100, K = 100, and N = 100. a. What is the level of output in this country? b. Does this production function exhibit constant returns to scale. Demonstrate by example. c. If the economy is competitive so that factors of production are paid the value of their marginal products, what is the share of total income will go to land?

a. 2,000 b. Yes, the production function exhibits constant returns to scale. Doubling each factor of production to 200 will double output to 4,000. c. 10 percent

Suppose that two countries are exactly alike in every respect except that the citizens of country A have a higher saving rate than the citizens of country B. a. Which country will have the higher level of output per worker in the steady state? b. Which country will have the faster rate of growth of output per worker in the steady state?

a. Country A will have the higher level of output per worker. b. In the steady state the growth rate of output per worker will be zero in both country A and country B.

Although "inflation is always and everywhere a monetary phenomenon," explain why: a. the start of a hyperinflation is typically related to the fiscal policy situation, and b. the end of a hyperinflation is usually related to changes in fiscal policy.

a. Hyperinflations frequently begin when governments require additional revenue from seigniorage because tax revenue and/or government borrowing is insufficient to cover government spending. The additional seigniorage is obtained by printing money, which leads to hyperinflation. b. Hyperinflations usually end when fiscal policy changes, including tax increases and government spending cuts, are made to eliminate the need for seigniorage and stops the excessive increase in money.

Explain how the Solow growth model differs from models of endogenous growth with respect to: a. the sources of technological progress. b. returns to capital.

a. The Solow growth model assumes technological growth exists, while endogenous growth models try to explain where technological progress comes from. b. The Solow growth model assumes diminishing returns to capital, while endogenous growth models assume constant returns to capital.

Based on the Solow growth model with population growth and labor-augmenting technological progress, explain how each of the following policies would affect the steady-state level and steady-state growth rate of total output per person: a. a reduction in the government's budget deficit b. grants to support research and development c. tax incentives to increase private saving d. greater protection of private property rights

a. The reduction in the budget deficit increases the saving rate, which will increase the steady-state level of output per person, but not alter the steady-state growth rate of output per person. b. Grants to support research and development may improve the rate of technological progress, which will increase the steady-state level and growth rate of output per person. c. Greater private saving increases the saving rate, which will increase the steady-state level of output per person, but not alter the steady-state growth rate of output per person. d. Greater protection of property rights may be an institutional improvement that improves the rate of technological progress, which will increase the steady-state level and growth rate of output per person.

Two countries, Highland and Lowland, are described by the Solow growth model. Both countries are identical, except that the rate of labor-augmenting technological progress is higher in Highland than in Lowland. a. In which country is the steady-state growth rate of output per effective worker higher? b. In which country is the steady-state growth rate of total output higher? c. Does the Solow growth model predict that the two economies will converge to the same steady state?

a. The steady-state growth rate of output per effective worker is zero in both countries. b. The steady-state growth rate of total output will be higher in Highland because of the higher rate of technological progress. c. No, the Solow growth model predicts that the economies will converge to different steady states because they have different rates of technological progress.