Intermediate Macro Test 1
One reason economic activity fluctuates is that the central bank leads the economy into a recession in order to bring down inflation.
True
Suppose x grows at a rate of g(x) = 5 percent and y grows at a rate of g(y) = 12 percent. If z = y*x, then z grows at ______ percent; if z = x/y, z grows at ______ percent.
17; -7
If Y = (A)[K^(1/3)][L^(2/3)] and A grows at a rate of 1 percent per year, K grows at a rate of negative 3 percent per year and L grows at a rate of 3 percent per year, then the growth rate of Y is:
2 percent
If population doubles every 35 years, then the growth rate of population is:
2 percent
The average annual growth rate of per capita in the United States from 1870 to 2015 is:
2 percent
Suppose k grows at a rate of g(k) = 3 percent and l grows at a rate of g(l) = 9 percent. If y = k^(1/3)l^(1/3), then y grows at _______ percent.
4
Consider a perfectly competitive economy with a production function Y = (A)[K^(1/3)][L^(2/3)]. There are 27 workers who produce cream cheese (a numéraire good) with 125 units of capital. If the productivity parameter is equal to 1, and the economy produces 40 tons of cream cheese in equilibrium, what is the sum of the total payments to capital and labor?
40 tons of cream cheese
Suppose k, l, and A grow at constant rates given by g(k), g(l), and g(A). What is the growth rate of y if y = (A)[(k)^B][(l)^(1-B)]
g(y) = g(A) + Bg(k) + (1-B)g(l)
Consider a simple economy producing 2 goods: coffee and TVs. In 2014 the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on this information the percentage change in real GDP in chained prices benchmarked to 2015 is:
-16.5%
Consider a simple economy producing 2 goods: coffee and TVs. In 2014 the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on this information the inflation rate is approximately:
-6.2%
Which of the following is an example of a ratio scale?
1, 5, 25, 125, 625...
If the production function is given by Y = (A)[K(t)^(1/3)][L^(2/3)], the saving rate, s, is 20 percent; the depreciation rate, d, is 10 percent; and A = L = 1, the steady-state level of output is:
1.4
The difference between a parameter and an exogenous variable is that:
A parameter is fixed over time, while an exogenous variable is allowed to change over time
The equation Y = F(K, L) = (A)[K^(1/3)][L^(2/3)] is an example of:
A production function
According to the Solow model two countries will grow at different rates if:
Both have different steady-state level of output and the same capital stock below the steady-state level.
Recently, the largest share of GDP is:
Consumption
This year a real estate agent helped you buy a house for $200,000 which was originally built in 1985. The agent's commission was $12,000. How will this transaction affect this year's GDP?
Consumption expenditures will increase by $12,000.
In a simple model of supply and demand the equation for the demand curve is given by Q = 20-10P and the equation for the supply curve is given by Q = 5 + 5P. The solution of the model is:
Q = 10; P = 1
If net investment is negative:
The economy is above its steady state and growth of output is negative.
What is an explanation for why an economy eventually settles in steady state?
The production function exhibits diminishing returns to capital; The capital stock depreciates at a constant rate; Eventually, investment generated is equal to the amount of capital depreciated
Imagine increases in the parameters of the Solow model that are all identical in magnitude. Which one of the following parameters will result in the largest increase in steady-state output?
The productivity parameter
Which of the following is included in TFP?
The quality of labor
If population and GDP are growing at the same rates, then per capita GDP does not grow.
True
If real GDP increases by 2 percent and nominal GDP increased by 4 percent, the inflation is approximately 2 percent.
True
In 1990, a country's per capita income was 1,000. By the year 2000, it was 1,650. The average annual growth rate was approximately 0.05.
True
In a Cobb-Douglas production function, the factor share of income going to each input is equal to the exponent on the input in the production function.
True
In part, macroeconomists study individual behavior and microeconomic theories to create theories of aggregate economic activity.
True
In the Solow diagram, an increase in the investment rate will cause a decrease in consumption for all levels of capital.
True
In the long run, the real interest rate is equal to the marginal product of capital.
True
Over the long term, economic growth swamps economic fluctuations.
True
Per capita GDP can grow at a negative rate.
True
Suppose we compare the GDP per person in Uganda and the United States in two ways: first using the exchange rate method and second using the relative price-based conversion as well. Then, Uganda appears to be richer under the relative price-based conversion than with the exchange rate conversion.
True
The change in the capital stock is a flow variable.
True
Total factor productivity explains a larger amount of the difference in income per capita in the Solow model than in the production model.
True
Until 1970, labor's share of GDP has been relatively stable at approximately two-thirds of GDP.
True
Wages in Ancient Greece and Rome were approximately equal to wages in seventeenth-century France.
True
When comparing GDP across countries, it is better to use comparisons based on common prices than simply on exchange rate conversions.
True
You plot the production function for the United States on a graph with output per person on the vertical axis and capital per person on the horizontal axis. If a shock occurs causing the productivity parameter to increase, the production function would shift upward.
True
Which of the following questions would a macroeconomist be most interested in answering?
Why did the prices rise in many countries in the 1970s?
Which of the following questions does the Solow model NOT help to explain?
Why do countries sustain growth in the long run?
Which of the following production functions exhibits constant returns to scale?
Y = (K^a)[L^(1-a)], Y = [K^(1/3)][L^(2/3)], Y = (K^0.1)(L^0.9), Y = [K^(1/4)][L^(3/4)]
If the production function is given by Y = [K^(1/3)][L^(2/3)] and K = 27 and L = 8, total output equals:
Y = 12
If C(t) denotes consumption, I(t) denotes investment, and Y(t) is output, the resource constraint in the Solow model is:
Y(t) = C(t) + I(t)
According to Figure 4.5, does the production model accurately predict the level of per capita GDP for Singapore?
Yes, because the predicted value of per capita GDP for Singapore is close to the actual value of its per capita GDP.
Which of the following counts as investment?
You buy a new house.
The steady state is defined as the point where capital accumulation, Delta K(t) is equal to:
Zero
In Figure 5.3, at K(2), capital accumulation is _______, the economy is _______, and consumption is ________.
Zero; In the steady state; Positive
In Figure 5.2, steady-state consumption is represented by:
a --> b
Suppose the variable "a" grows at a constant rate g(a), the variable "b" grows at a constant rate g(b), the variable "c" grows at a constant rate g(c), and the variable "d" grows at a constant rate g(d). If we know that g(a) = (1/2)[g(b) - g(d)] + (3/4)g(c), what is the relationship between variables a, b, c, and d?
a = {[b^(1/2)]/[d^(1/2)]} * c^(3/4)
In Figure 4.4, MPL represents the labor _______, L represents the labor _______, and the intersection of the two yields the _________.
Demand; Supply; Equilibrium wage
If the depreciation and saving rates are constant, the economy eventually will reach the steady state in the Solow model because of:
Diminishing returns to capital in production.
A production function exhibits increasing returns to scale when you:
Double each input - you more than double the output.
The rule of 70 states that if y(t) grows at a rate of g percent per year, then the number of years it takes y(t) to:
Double is approximately equal to 70/g.
In the last three hundred years, the standards of living between the richest and poorest countries have converged.
False
Potential output is a measure of per capita GDP in the future.
False
The Solow model is a static model and thus can only tell us the levels of our endogenous variables in a steady state.
False
The fraction of people living in poverty has risen since 1960 as the populations of India and China have grown substantially.
False
The investment rate in a particular economy is a function of the amount of output (income) an economy generates each year.
False
The standard replication argument implies that Italy can raise its per capita GDP by doubling the amount of capital per person.
False
We can solve a model for all the endogenous variables if it has five equations and six unknowns.
False
We cannot tell whether the production function Y = (K^a)[L^(1-a)] has constant returns to scale, because we do not know the value of a.
False
When price equals marginal cost, economic profits are positive.
False
When the trade balance is negative, domestic producers are exporting more goods than are being imported.
False
The equation MPK = r* yields the:
Optimal amount of capital, K*, a firm fires.
The positive budget deficit since the early 2000s in the US implies that:
Federal government spending exceeds federal government revenue.
When a state builds a new penitentiary, _______ rise(s), but that does not imply that _______ improve(s).
GDP; Welfare
During 1940s, ________ increased sharply as a percentage of US GDP because of _________.
Government expenditure; World War II
Immediately following the increase in the saving rate, output grows rapidly. As the economy approaches its new steady state, the growth rate:
Gradually declines
In the Solow model, if investment is _______ depreciation, the capital stock ______.
Greater than; Grows
When we look at the _______ run, we are concerned with _________.
Long; The causes of economic growth
With a Cobb-Douglas production function Y = [K^(1/3)][L^(2/3)], the marginal product of capital is _______ and the marginal product of labor is _______.
MPK = (1/3)(Y/K); MPL = (2/3)(Y/L)
The solution to the firm's profit maximization is:
MPL = w and MPK = r
Consider the Solow model exhibited in Figure 5.4. If a country's saving rate increases from s(1) to s(2), the economy would:
Move from point a to point b
In the Solow model, if a country's saving rate increases, the country:
Moves from a relatively low steady state to one that is higher.
When comparing shares of consumption in GDP it is best to use _______ variables. When comparing real rates of economic growth it is best to use _______ variables.
Nominal; Chain-weighted
Consider the following model of the labor market: Labor Supply: L^s = (a)(w)+l Labor Demand: L^d= f-w The values of the equilibrium quantity of labor, L, and wage, w, are:
L* = [(a)(f)+l]/(1+a) w* = (f-l)/(1+a)
In Figure 5.1, the capital stock at K(1) is not the steady state because:
Gross investment is higher than capital depreciation.
If we define the saving rate as s, output as F[K(t), L], and the depreciation rate as d, and if (s){F[K(t), L]} > (d)[K(t)], the economy is:
Growing
If MPL < w, the firm:
Should fire some labor until MPL = w.
If MPK > r, the firm:
Should hire more capital until MPK = r
If nominal GDP grew by 7% in year 2 relative to year 1, the price level increased by 2% during the same period and the real GDP in year 1 was $1,000, what was real GDP in year 2?
$1,050
After graduating college, you start a job making $40,000. Your earnings grow at a constant rate of 3 percent per year. When you retire 40 years later, you are earning approximately:
$130,000
Consider Table 2.1. Total GDP in 2010 was about _____ billion.
$14,964
Consider Table 2.2. From this data, total net domestic product in 2015 was about _______ billion.
$15,460
A construction company produces a $200,000 house using $50,000 worth of wood and steel in addition to $50,000 of labor hours. The value added by the construction company is:
$150,000
What is the marginal product of capital (MPK) for the production function Y = (A)[K^(1/2)][L^(1/2)]?
(1/2){[(A)[K^(1/2)][L^(1/2)]]/K}
Suppose India has a per capita GDP that is 0.074 times the United States GDP. It has a capital-per-person ratio that is 0.035 times that of the United States. Compared to the United States, the implied value of total factor productivity for India is approximately:
0.23
According to Figure 3.7, the fastest growing country during 1960-2014 had a level of per capita GDP approximately equal to ______ of the US level.
1/4
In 1994 your parents made an investment of $4,000. By 2015 the investment grew to $32,000. Assuming a constant rate of growth, what was the average annual growth rate of this investment?
10%
With an average annual growth rate of 5 percent per year, per capita income will increase by what factor over a century?
126
In a production model where the production function is Y = (A)[K^(1/3)][L^(2/3)] the equilibrium wage rate is equal to 30/27, labor supply is 27 workers and the productivity parameter is equal to 1. What is the equilibrium level of capital?
125
According to the International Money Fund, income per capita in Bhutan in 2015 was Int$8,201 while income per capita in Chad in the same year was Int$1,214. If Bhutan's investment rate is 40% and Chad's investment rate is 10%, what is the productivity ratio [A(Bhutan)/A(Chad)]? Round to the nearest tenth. Assume both countries are in their steady states.
2.3
Figure 5.5 represents two countries, 1 and 2. Country ______ has a higher depreciation rate and, therefore, has a ______ steady state than the other country.
2; Lower
Assume that both Japan's and the United States' average annual per capita GDP growth rates are 2 percent per year, and both countries began with an initial per capita GDP of $1,000. However, the United States has been growing since 1915 and Japan only since 1965. In 2015, the United States would have been ______ than Japan.
2.69 times richer
Assume a production function is given by Y = (A)[K(t)^(1/3)][L^(2/3)]. If A = L = 1, the depreciation rate is d = 0.05, and the saving rate is s = 0.1, the steady-state level of capital is about:
2.8
Consider an economy characterized by the production function Y = (A)[K^(1/2)][L^(1/2)] where the productivity parameter is equal to 1.2. How many units of output can be produced with 25 units of capital and 64 workers?
48
Consider Table 2.1. The federal government's share of total GDP in 2010 was about _______ percent, and in 2015 it was _______ percent.
9; 7
Assume a production function is given by Y = (A)[K(t)^(1/3)][L^(2/3)]. If A = 2 and L = 1, the depreciation rate is d = 0.05, and the saving rate is s = 0.1, the steady-state level of capital is about:
8.0
Consider Figure 4.3. The shape of this production function suggests:
A constant marginal product of capital
Output per person is higher when:
A country is more efficient in adopting a technology, A country has a higher capital-to-population ratio, A country has stronger property rights and contract enforcement.
Consider Figure 4.1. The shape of this production function suggests:
A diminishing marginal product of capital
If per capita GDP in 2014 was $900, in 2015 was $1,000, and in 2016 was $1,200, the growth rate of per capita GDP between 2014 and 2016 was:
About 33 percent
A firm uses capital and labor to produce a good. Which of the following is greatest?
Accounting profit
The difference between an exogenous variable and an endogenous variable is that:
An exogenous variable is an input to the model, while an endogenous variable is an outcome of the model.
Considering the figure below, the transitional dynamics best describe:
An increase in the depreciation rate, A decline in the saving rate
Over the last one hundred years, potential output has:
Been relatively equal to actual output except for the Great Depression era.
The United States and Chile have both grown at about 2 percent per year for the last 40 years. By the principle of transition dynamics, what does this imply?
Both countries are at their steady states.
According to the income approach to GDP, the largest percentage of GDP comes from:
Compensation to employees
The Solow model assumes the saving rate is:
Constant
A production function has inputs X, Y, and Z and a productivity parameter A. The production function [A^(1/3)][X^(1/3)][Y^(1/3)][Z^(1/3)] exhibits:
Constant returns to scale
One of the key characteristics of the Cobb-Douglas production function is:
Constant returns to scale
If the productivity parameter is assumed to equal 1, the production model:
Correctly identifies that countries are richer if they have more capital, Incorrectly predicts that poor countries are substantially richer than they are, Incorrectly predicts that some countries are richer than the United States.
Macroeconomics is to microeconomics what __________ is to ____________.
Cosmology; Particle physics
In Figure 5.1, if the economy begins with the initial capital stock at K(3), the capital stock will _______ and the economy will ________.
Decrease; Shrink
At the height of the 2008 recession, US employment ___________:
Decreased by approximately 0.5% per month.
Consider Table 2.1. Government consumption as a share of GDP ______ and investment's share ______ between 2010 and 2015.
Decreased; Increased
Using the Solow model, if, in time t = 0, the initial capital stock is K(0) = 100, investment is I(0) = 25, and d = 0.1 is the depreciation, capital accumulation from period 0 to period 1 is:
Delta K(1) = 15
Using the Solow model, if, in time t = 50, the capital stock is K(50) = 150, investment is I(50) = 15, and d = 0 is the depreciation rate, capital accumulation from period 50 to 51 is:
Delta K(51) = 0
The marginal product of the labor curve represents the:
Demand for labor
The three main variables we discuss in the short run are:
Economic fluctuations, inflation and unemployment
In a simple model of supply and demand the equation for the demand curve is given by Q = 20-10P and the equation for the supply curve is given by Q = 5 + 5P. P and Q are:
Endogenous variables
Output per capita and output per worker are:
Equal in the production model, but output per capita is smaller in general.
A US citizen works for a US company in Germany. The income earned by the citizen increases US GDP.
False
A model comparing income in the United States and Ethiopia is successful if it predicts the United States is richer than Ethiopia but not how much richer.
False
An economic model is an exact replica of the economy.
False
Capital per person explains about one-half of the difference in per capita income between the richest and poorest countries.
False
If a variable is growing at a positive constant rate, when plotted on a ratio scale, the slope of the plot will be becoming steeper over time.
False
If an economy has a higher investment rate and a higher depreciation rate, the economy will have a higher level of output.
False
If the marginal product of capital is less than the rental rate of capital, the firm should rent more capital.
False
In most countries, inflation has been relatively high since the 1980s.
False
If MPK = r, the firm:
Has the optimal amount of capital.
According to the Solow model, in the steady state, countries with high saving rates should have a:
High capital-output ratio
The unemployment rate in the United States has historically been:
Higher than Europe until 1980 and since then, lower than Europe.
In the Solow model, defining s as the saving rate, Y(t) as output, and C(t) as consumption, investment I(t) is given by:
I(t) = (s)[Y(t)]
One reason for the larger trade deficit in the last several decades is:
Increased consumption
Which of the following is NOT a step that macroeconomists take to study aggregate economic questions?
Include all possible variables from the real world to construct a comprehensive model.
In Figure 5.1, if the economy begins with the initial capital stock at K(1), the capital stock will _______ and the economy will ________.
Increase; Grow
In Figure 5.2, steady-state investment is represented by:
Investment is not represented
In the Solow model, net investment is defined as:
Investment minus capital depreciation
The level of consumption:
Is largest when the economy is above its steady state.
Consider two economies. If each country has the same production function and the same amount of capital and labor, the country that _______ produces more.
Is more productive
Consider an economy described by the textbook Solow model with a production function. The economy is producing 100 units of output and the productivity parameter is equal to 1. If the depreciation rate is 6%, and there are 125 workers, the growth rate of the economy:
Is positive because the economy is below its steady state.
In the Solow model, in every period, a fraction of total output _______, which _______ next period's capital stock.
Is saved; Adds to
Suppose that in 1965 Japan has an initial per capita GDP of $12,000 per year and China has a per capita GDP of $5,000. But China is growing at 5 percent per year and Japan is growing at percent per year. _________ would have been richer in 2015 with a per capita GDP of approximately _______.
Japan; $31,500
Which of the following is a cost of economic growth?
Job loss in certain sectors, increased income inequality, global warming
In the Solow model, the equation of capital accumulation is:
K(t+1) = K(t) + I(t) - dK(t)
Suppose you are given the data for Brazil and Portugal. In Brazil, the saving rate is 0.1 and the depreciation rate is 0.1, while in Portugal the saving rate is 0.2 and the depreciation rate is 0.1. Using the Solow model, you conclude that in the steady state:
Portugal has a higher capital-output ratio than Brazil.
Which of the following is an exogenous variable in the Solow model?
Productivity, The depreciation rate, The saving rate, The initial capital stock
An increase in ______ leads to a higher steady-state level of output per worker, and a decline in the ______ leads to a lower steady-state level of output per worker.
Productivity; Saving rate
Which of the following is/are left out of the Solow model?
Real interest rates
Which of the following is NOT an example of capital?
Screws and bolts used for making cars at an automobile factory.
A country that, since 1980, has shown convergence to the United States is:
South Africa
In Figure 5.1, if the economy begins with the initial capital stock at K(2), the capital stock will ______ and the economy will _______.
Stay constant; Be in its steady state
In the Solow model, if, in the absence of any shocks, the capital stock remains at K* forever, this rest point is called the:
Steady state
Which of the following does NOT increase the US GDP?
The US government increases social security payments.
The marginal product of labor is defined as:
The additional output generated by hiring an additional unit of labor.
In the production model from the text, which of the following is NOT an exogenous variable or a parameter?
The amount of capital
The short run is concerned with ___________, while the long run is concerned with __________.
The causes of economic fluctuations; The determinants of economic growth
Under national income accounting, GDP equals:
The goods produced in the economy, the income earned in the economy, and the total purchases in the economy.
How quickly GDP doubles will depend on:
The growth rate of GDP
Starting from steady state, a permanent increase in the rate of depreciation in the Solow model causes:
The growth rate of output to fall temporarily and the level of GDP to fall permanently.
An economy starts in steady state. A war causes a massive destruction of the capital stock. This shock will cause:
The growth rate of output to rise initially as the economy begins to converge to the old steady state.
Imagine a two-good economy where the quantity of the goods produced is unchanged over time, but where prices have increased. Then, in the most recent year, real GDP will be:
The largest number when using the Paasche index.
A central topic of study in macroeconomics is __________, while a central topic of study in microeconomics is _________.
The overall performance of an economy; An individual market
According to the principle of transition dynamics, which economy will grow fastest?
The same country 1 year after the natural disaster destroyed most of the capital stock.
If a natural disaster destroys a large portion of a country's capital stock but the saving and depreciation rates are unchanged, the Solow model predicts that the economy will grow and eventually reach:
The same steady-state level of output as it would have before the disaster.
If K = K bar and L = L bar, then output is determined by:
The total amount of capital and labor available in an economy.
Net exports are also called:
The trade balance
In the labor market model, an endogenous variable is:
The wage rate
Defining per capita GDP in 2016 as y(2016) and per capita GDP in 2015 as y(2015), the growth rate of per capita GDP, g, from 2015 to 2016 is given by:
g = [y(2016)-y(2015)]/y(2015)
Consider the Solow model exhibited in Figure 5.4. Which of the following is/are true? i. For any single country, the movement from point a to b is due to an increase in the saving rate, s(1) --> s(2). ii. For any single country, the movement from point c to b is due to an increase in capital stock for the saving rate, s(2). iii. If s(1) and s(2) stand for the saving rates in Countries 1 and 2, respectively, Country 2 has a lower saving rate.
i. and ii.
Which of the following does macroeconomics endeavor to answer? i. How does a dairy farmer react to rising wheat prices? ii. What causes an increase in the price of Apple stock? iii. What are potential causes of financial crises?
iii only
The firm's profit maximization problem is:
max pi = F(K, L) - rK - wL {K, L}
