EC 302 Exercises
Loretta agrees to lend Ted $500,000 to buy computers for his consulting firm. They agree to a nominal interest rate of 8%. Both expect the inflation rate to be 2%. (a) Calculate the expected real interest rate. (b) If inflation turns out to be 3% over the life of the loan, what is the real interest rate? Who gains from unexpectedly high inflation, Loretta or Ted? (c) If inflation turns out to be 1% over the life of the loan, what is the real interest rate? Who gains from unexpectedly low inflation, Loretta or Ted?
(a) 8% - 2% = 6%. (b) 8% - 3% = 5%. Ted gains from unexpectedly high inflation, because he repays the loan with dollars that aren't worth as much as was expected. (c) 8% - 1% = 7%. Loretta gains from unexpectedly low inflation, because she gets repaid with dollars that are worth more than was expected.
Suppose a firm's hourly marginal product of labor is given by MPN = A (200 - N). (a) If A = 0.2 and the real wage rate is $10 per hour, how much labor will the firm want to hire? (b) Suppose the real wage rate rises to $20 per hour. How much labor will the firm want to hire? (c) With the real wage rate at $10 per hour, how much labor will the firm want to hire if A rises to 0.5?
(a) The firm will hire labor such that w = MPN, or 10 = 0.2(200 - N), so N = 150. (b) Now 20 = 0.2(200 - N), so N = 100. The firm's labor demand falls when the wage rate rises. (c) Now 10 = 0.5(200 - N), so N = 180. The increase in productivity increases labor demand.
Compare and contrast the classical and Keynesian schools of thought for the following economic issues. (a) The flexibility of wages and prices. (b) The importance of macroeconomic policies.
(a) The flexibility of wages and prices is a principal point of disagreement between classical economists and Keynesians. Classical economists believe that wages and prices are quite flexible; in response to a change in market conditions, wages and prices adjust quickly to their new market-clearing levels. Keynesians believe that wages and prices are rigid or sticky; in response to changes in the economy, wages and prices adjust slowly to their new market-clearing levels. (b) Classicals and Keynesians also disagree about the use of macroeconomic policies. Given wage-price flexibility, classical economists believe that the market economy normally provides for full employment. They believe that government intervention in the form of macroeconomic fiscal and monetary policies is not needed to prevent recessions. Given slow adjustments in wages and prices, Keynesians believe that recessions could plague the economy for several years. They believe that efficient use of macroeconomic policies could return the economy to equilibrium more quickly.
How would each of the following events affect Cheryl Shirker's supply of labor? (a) Cheryl's firm announces a reorganization plan, in which she will get a big promotion and raise in six months. (b) Cheryl's speculative investment in plutonium futures pays off big, netting her a profit of $300 thousand. (c) Cheryl's father, who had planned to leave her a large bequest, must spend all his wealth on medical bills after a prolonged illness.
(a) The higher future real wage reduces current labor supply. (b) Higher wealth reduces labor supply. (c) Lower wealth increases labor supply.
A firm has current and future marginal productivity of capital given by MPK = 10,000 - 2K + N, and marginal productivity of labor given by MPN = 50 - 2N + K. The price of capital is $5000, the real interest rate is 10%, and capital depreciates at a 15% rate. The real wage rate is $15. (a) Calculate the user cost of capital. (b) Find the firm's optimal amount of employment and the size of the capital stock.
(a) uc = (r + d)pK = 0.25 × $5000 = $1250. (b) Setting w = MPN gives 15 = 50 - 2N + K, or 2N = 35 + K. Setting uc = MPK gives 1250 = 10,000 - 2K + N, or N = -8750 + 2K, or 2N = -17,500 + 4K. Setting -17,500 + 4K = 35 + K gives 3K = 17,535, which yields K = 5845. Then N = 2940.
How would the desired capital stock be affected by a decline in the user cost of capital?
A firm sets its capital stock such that the future marginal product of capital equals the user cost, where the future marginal product of capital declines as the amount of capital increases. A decline in the user cost requires that the future marginal product of capital also decline to maintain the equality. So the desired capital stock increases.
Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment? A) $1.5 million B) $2.0 million C) $2.5 million D) $3.5 million
A) $1.5 million
Let the production function be Y = AK0.3N0.7. If K=1000, N=50, and A = 15, what is Y? A) 1842 B) 6106 C) 750,000 D) 123
A) 1842
An economy has government purchases of 2000. Desired national saving and desired investment are given by Sd = 200 + 5000r + 0.10Y - 0.20G Id = 1000 - 4000r When the full-employment level of output equals 5000, then the real interest rate when the goods market is in equilibrium will be A) 7.78%. B) 10.00%. C) 14.44%. D) 23.33%.
A) 7.78%.
By Marks buys a one-year German government bond (called a bund) for $400. He receives principal and interest totaling $436 one year later. During the year the CPI rose from 150 to 162. The nominal interest rate on the bond was ________, and the real interest rate was ________. A) 9%; 1% B) 9%; -1% C) 36%; 24% D) 36%; 12%
A) 9%; 1%
Which of the following best describes a typical business cycle? A) Economic expansions are followed by economic contractions B) Inflation is followed by unemployment C) Trade surpluses are followed by trade deficits D) Stagflation is followed by inflationary economic growth
A) Economic expansions are followed by economic contractions
Which of the following equations describes the government deficit? A) G + TR + INT - T B) G + TR - INT - T C) G - TR + INT - T D) G - TR - INT - T
A) G + TR + INT - T
The uses-of-saving identity shows that if the government budget deficit rises, then one of the following must happen. A) Private saving must rise, investment must fall, and/or the current account must fall. B) Private saving must rise, investment must fall, and/or the current account must rise. C) Private saving must rise, investment must rise, and/or the current account must fall. D) Private saving must fall, investment must rise, and/or the current account must rise.
A) Private saving must rise, investment must fall, and/or the current account must fall.
The product approach to calculating GDP A) adds together the market values of final goods and services produced by domestic and foreign-owned factors of production within the nation in some time period. B) includes the market value of goods and services produced by households for their own consumption but excludes the value of the underground economy. C) is superior to the income approach because, unlike the income approach, it gives us the real value of output. D) adds together the market values of final goods, intermediate goods, and goods added to inventories.
A) adds together the market values of final goods and services produced by domestic and foreign-owned factors of production within the nation in some time period.
If a firm's expected marginal product of capital exceeds its tax-adjusted user cost of capital, the firm will A) increase its investment spending on capital goods. B) reduce its investment spending on capital goods. C) not change its investment spending on capital goods. D) increase the tax-adjusted user cost of capital.
A) increase its investment spending on capital goods.
A technological improvement will A) increase the desired capital stock. B) decrease the desired capital stock. C) have no effect on the desired capital stock. D) have the same effect on the desired capital stock as an increase in corporate taxes.
A) increase the desired capital stock.
If the marginal product of capital doesn't change as the amount of capital increases, a figure showing the relationship between output and capital A) is a straight line with constant upward slope. B) is a straight line with a slope of zero. C) is a vertical line. D) slopes upward with a slope that declines as the amount of capital increases.
A) is a straight line with constant upward slope.
The inflation rate is the A) percent increase in the average level of prices over a year B) percent increase in output over a year C) percent increase in the unemployment rate over a year D) price level divided by the level of output
A) percent increase in the average level of prices over a year
Private saving is defined as A) private disposable income minus consumption. B) net national product minus consumption. C) private disposable income minus consumption plus interest. D) private disposable income minus consumption plus interest plus transfer payments.
A) private disposable income minus consumption.
In the production function Y = AF(K, N), A is ________, K is ________, and N is ________. A) total factor productivity; the capital stock; the number of workers employed B) total factor productivity; investment; the number of workers employed C) the productivity of labor; the capital stock; the size of the labor force D) the productivity of labor; investment; the size of the labor force
A) total factor productivity; the capital stock; the number of workers employed
John Maynard Keynes disagreed with the classical economists because he believed that A) wages and prices adjust slowly. B) international trade plays a major role in the macroeconomy. C) government intervention in the economy cannot reduce business cycles. D) unemployment will be eliminated quickly by the invisible hand of the market.
A) wages and prices adjust slowly.
With no inflation and a nominal interest rate (i) of .03, a person can trade off one unit of current consumption for ________ units of future consumption. A) 0.97 B) 1.03 C) .03 D) -.03
B) 1.03
Suppose the economy's production function is Y = AK0.3N0.7. Suppose K = 200, N = 2000, and A = 1. Calculate the marginal product of capital. A) 1.0 B) 1.5 C) 2.0 D) 2.5
B) 1.5
Suppose the marginal product of labor is MPN = 200 - 0.5N where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w is the real wage. What is the equilibrium real wage? A) 5 B) 10 C) 15 D) 20
B) 10
Suppose the marginal product of labor is MPN = 200 - 0.5N where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w is the real wage. If a supply shock increases the marginal product of labor by 10 (to MPN = 210 - 0.5 N), by how much does the real wage increase? A) 1 B) 2 C) 3 D) 4
B) 2
Suppose the marginal product of labor is MPN = 200 - 0.5N where N is aggregate employment. The aggregate quantity of labor supplied is 100 + 4w, where w is the real wage. The government imposes a minimum wage of 60. How much unemployment will this create among unskilled labor? A) 0 B) 60 C) 80 D) 100
B) 60
Monica grows coconuts and catches fish. Last year she harvested 1500 coconuts and 600 fish. She values one fish as having a worth of three coconuts. She gave Rachel 300 coconuts and 100 fish for helping her to harvest coconuts and catch fish, all of which were consumed by Rachel. In terms of fish, Monica's income would equal A) 700 fish. B) 900 fish. C) 1100 fish. D) 2700 fish.
B) 900 fish.
Monica grows coconuts and catches fish. Last year she harvested 1500 coconuts and 600 fish. She values one fish as having a worth of three coconuts. She gave Rachel 300 coconuts and 100 fish for helping her to harvest coconuts and catch fish, all of which were consumed by Rachel. Monica set aside 200 fish to help with next year's harvest. In terms of fish, consumption would equal A) 700 fish. B) 900 fish. C) 1100 fish. D) 2700 fish.
B) 900 fish.
An adverse oil-price shock reduces labor demand. What happens to current employment and the real wage rate? A) Both employment and the real wage rate would increase. B) Both employment and the real wage rate would decrease. C) Employment would increase and the real wage would decrease. D) Employment would decrease and the real wage would increase.
B) Both employment and the real wage rate would decrease.
Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a 25% rate, machine B costs $10,000 and depreciates at a rate of 20%, machine C costs $20,000 and depreciates at a rate of 10%, and machine D costs $17,000 and depreciates at a rate of 11%. The expected real interest rate is 5%. A) Machine A B) Machine B C) Machine C D) Machine D
B) Machine B
To what extent are homemaking and child-rearing accounted for in the government's GDP accounts? A) Not at all B) Only to the extent that they are provided for pay C) Only to the extent that taxes are paid on them D) All homemaking and child-rearing are accounted for
B) Only to the extent that they are provided for pay
The income—expenditure identity says that A) Y = C + S + T. B) Y = C + I + G. C) Y = C + I + G + NX. D) Y = C + I + G + NX + CA.
C) Y = C + I + G + NX.
What two factors should you equate in deciding how many workers to employ? A) The marginal product of labor and the marginal product of capital B) The marginal product of labor and the real wage rate C) The marginal product of labor and the real interest rate D) The marginal product of capital and the real wage rate
B) The marginal product of labor and the real wage rate
A winter ice storm has paralyzed the entire east coast, reducing productivity sharply. This supply shock shifts the marginal product of labor curve A) up and to the right, raising the quantity of labor demanded at any given real wage. B) down and to the left, reducing the quantity of labor demanded at any given real wage. C) up and to the right, reducing the quantity of labor demanded at any given real wage. D) down and to the left, raising the quantity of labor demanded at any given real wage.
B) down and to the left, reducing the quantity of labor demanded at any given real wage.
If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving, then a rise in the real interest rate leads to a ________ in consumption and a ________ in saving, for someone who's a lender. A) fall; fall B) fall; rise C) rise; rise D) rise; fall
B) fall; rise
Capital goods are A) a type of intermediate good. B) final goods, because they are not used up during a given year. C) produced in the same year as the related final good, whereas intermediate goods are produced in different years. D) produced in one year, whereas final goods are produced over a period of more than one year.
B) final goods, because they are not used up during a given year.
Net national product equals A) gross national product minus statistical discrepancy. B) gross national product minus depreciation. C) national income minus taxes on production and imports. D) national income plus depreciation.
B) gross national product minus depreciation.
An increase in expected future output while holding today's output constant would A) increase today's desired consumption and increase desired national saving. B) increase today's desired consumption and decrease desired national saving. C) decrease today's desired consumption and increase desired national saving. D) decrease today's desired consumption and decrease desired national saving.
B) increase today's desired consumption and decrease desired national saving.
Economists often treat the economy's capital stock as fixed because A) labor is a more important factor of production than capital, so economists ignore capital. B) it takes a long time for new investment and the scrapping of old capital to affect the overall quantity of capital. C) there is very little capital in the economy compared with the amount of labor. D) unless the interest rate changes, the capital stock doesn't change.
B) it takes a long time for new investment and the scrapping of old capital to affect the overall quantity of capital.
A permanent increase in the real wage rate has a ________ income effect on labor supply than a temporary increase in the real wage, so labor supply is ________ with a permanent wage increase than for a temporary wage increase. A) larger; more B) larger; less C) smaller; more D) smaller; less
B) larger; less
In 2008, inflation exceeded expected inflation. In 2009, expected inflation exceeded inflation. Therefore the real interest rate was ________ than the expected real interest rate in 2008 and the real interest rate was ________ than the expected real interest rate in 2009. A) less; less B) less; greater C) greater; less D) greater; greater
B) less; greater
The two major reasons for the output growth in the U.S. economy over the last 125 years are A) population growth and low inflation B) population growth and increased productivity C) low unemployment and low inflation D) low inflation and low trade deficits
B) population growth and increased productivity
An adverse supply shock would A) shift the production function up and decrease marginal products at every level of employment. B) shift the production function down and decrease marginal products at every level of employment. C) shift the production function down and increase marginal products at every level of employment. D) shift the production function up and increase marginal products at every level of employment.
B) shift the production function down and decrease marginal products at every level of employment.
If a local government collects taxes of $500,000, has $350,000 of government consumption expenditures, makes transfer payments of $100,000, and has no interest payments or investment, its budget would A) show a surplus of $150,000. B) show a surplus of $50,000. C) be in balance with neither a surplus nor a deficit. D) show a deficit of $50,000.
B) show a surplus of $50,000.
Aggregation is the process of A) calculating real GDP based on nominal GDP and the price index. B) summing individual economic variables to obtain economywide totals. C) forecasting the components of GDP. D) predicting when recessions will occur.
B) summing individual economic variables to obtain economywide totals
The classical approach to macroeconomics assumes that A) wages, but not prices, adjust quickly to balance quantities supplied and demanded in markets. B) wages and prices adjust quickly to balance quantities supplied and demanded in markets. C) prices, but not wages, adjust quickly to balance quantities supplied and demanded in markets. D) neither wages nor prices adjust quickly to balance quantities supplied and demanded in markets.
B) wages and prices adjust quickly to balance quantities supplied and demanded in markets.
Calculate the user cost of capital of a machine that costs $5000 and depreciates at a rate of 25%, when the expected real interest rate is 5%. A) $150 B) $500 C) $1500 D) $5000
C) $1500
The Compagnie Naturelle sells mounted butterflies, using butterfly bait it buys from another firm for $20,000. It pays its workers $35,000, pays $1000 in taxes, and has profits of $3000. What is its value added? A) $3000 B) $19,000 C) $39,000 D) $59,000
C) $39,000
The Bigdrill company drills for oil, which it sells for $200 million to the Bigoil company to be made into gas. The Bigoil company's gas is sold for a total of $600 million. What is the total contribution to the country's GDP from companies Bigdrill and Bigoil? A) $200 million B) $400 million C) $600 million D) $800 million
C) $600 million
If the price level was 100 in 2014 and 102 in 2015, the inflation rate was A) 102% B) 20% C) 2% D) 0.2%
C) 2%
If the expected inflation rate was 2.5%, the expected real interest rate was 4.0%, and the actual inflation rate turned out to be 3.2%, then the real interest rate equals A) 1.7%. B) 3.2%. C) 3.3%. D) 4.7%.
C) 3.3%.
If nominal GDP for 2009 is $6400 billion and real GDP for 2010 is $6720 billion (in 2009 dollars), then the growth rate of real GDP is A) 0%. B) 0.5%. C) 5%. D) 50%.
C) 5%
An economy has full-employment output of 5000. Government purchases are 1000. Desired consumption and desired investment are given by Cd = 3000 - 2000r + 0.10Y Id = 1000 - 4000r where Y is output and r is the real interest rate. The real interest rate that clears the goods market is equal to A) 1.25%. B) 2.50%. C) 8.33%. D) 25.00%.
C) 8.33%.
As a result of the superb economics essay that you wrote during this quarter, you won the Adam Smith prize of $100. The receipt of these funds would be an example of A) the substitution effect being stronger than the income effect. B) the income effect being stronger than the substitution effect. C) a pure income effect. D) a pure substitution effect.
C) a pure income effect.
Larry's Lathe-makers Limited produces lathes, which are purchased by furniture manufacturers all over the world. The standard lathe depreciates over a twenty-five-year period. In the national income accounts, the lathes are classified as A) inventory. B) raw materials. C) capital goods. D) intermediate goods.
C) capital goods.
If Jeff's wage rate rises, he decides to work fewer hours. From this, we can infer that A) for Jeff, the substitution effect is greater than the income effect. B) for Jeff, the substitution effect is equal to the income effect. C) for Jeff, the substitution effect is less than the income effect. D) Jeff is a nitwit.
C) for Jeff, the substitution effect is less than the income effect.
Nations such as Egypt and Turkey may have wide differences between GNP and GDP because both the countries A) have a high level of imports and exports relative to GNP. B) have a large portion of their GNP produced by multinational corporations. C) have a large number of citizens working abroad. D) purchase large amounts of military wares from other countries.
C) have a large number of citizens working abroad.
If the government cuts taxes today, issuing debt today and repaying the debt plus interest next year, a rational taxpayer will A) spend the full amount of the tax cut today and reduce consumption next year. B) increase consumption today, before taxes go up next year. C) increase saving today, leaving consumption unchanged. D) leave a smaller gross bequest to her or his heirs
C) increase saving today, leaving consumption unchanged.
The difference between microeconomics and macroeconomics is that A) microeconomics looks at supply and demand for goods, macroeconomics looks at supply and demand for services. B) microeconomics looks at prices, macroeconomics looks at inflation. C) microeconomics looks at individual consumers, macroeconomics looks at national totals. D) microeconomics looks at national issues, macroeconomics looks at global issues.
C) microeconomics looks at individual consumers, macroeconomics looks at national totals
If a country's working-age population declines and its wealth increases, then the labor supply curve A) shifts to the left if the effect of the change in wealth is bigger than the effect of the change in the working-age population. B) shifts to the right if the effect of the change in wealth is bigger than the effect of the change in the working-age population. C) shifts to the left. D) shifts to the right.
C) shifts to the left.
The two most comprehensive, widely accepted macroeconomic models are A) the classical model and the supply-side model. B) the supply-side model and the real business cycle model. C) the classical model and the Keynesian model. D) the Austrian model and the Keynesian model.
C) the classical model and the Keynesian model.
The desire to have a relatively even pattern of consumption over time is known as A) excess sensitivity. B) the substitution effect. C) the consumption-smoothing motive. D) forced saving.
C) the consumption-smoothing motive.
The number of unemployed divided by the labor force equals A) the inflation rate B) the labor force participation rate C) the unemployment rate D) the misery index
C) the unemployment rate
The fact that the production function relating output to labor becomes flatter as we move from left to right means that A) the marginal product of labor is positive. B) the marginal product of capital is positive. C) there is diminishing marginal productivity of labor. D) there is diminishing marginal productivity of capital.
C) there is diminishing marginal productivity of labor.
The value of a producer's output minus the value of the inputs it purchases from other producers is called the producer's A) surplus. B) profit. C) value added. D) gross product.
C) value added.
If C = $500, I = $150, G = $100, NX = $40, and GNP = $800, how much is NFP? A) -$10 B) -$5 C) $5 D) $10
D) $10
In a given year, a country's GDP = $9841, net factor payments from abroad = $889, taxes = $869, transfers received from the government = $296, interest payments on the government's debt = $103, consumption = $8148, and government purchases = $185. The country had private saving equal to A) $285. B) $3850. C) $2397. D) $2112.
D) $2112.
At the start of the year, your firm's capital stock equaled $100 million, and at the end of the year it equaled $105 million. The average depreciation rate on your capital stock is 20%. Gross investment during the year equaled A) $1 million. B) $5 million. C) $7 million. D) $25 million.
D) $25 million.
Suppose that Freedonia has GDP equal to 2000 million, the capital stock is 1700 million, and the number of employees equals 70 million. The production function is Y = AK0.25N0.75. Total factor productivity of the economy is approximately equal to A) 0.09. B) 2.61. C) 4.19. D) 12.87.
D) 12.87.
During the Great Depression, the unemployment rate for the United States peaked at approximately A) 10% B) 70% C) 45% D) 25%
D) 25%
The marginal product of labor (measured in units of output) for Expando Corp. is given by MPN = A(400 - N) where A measures productivity and N is the number of labor hours used in production. Suppose the price of output is $3 per unit and A = 2.0. What will be the demand for labor if the nominal wage is $18? A) 57 B) 107 C) 197 D) 397
D) 397
If the price index last year was 1.0 and today it is 1.4, what is the inflation rate over this period? A) -4% B) 1.4% C) 4% D) 40%
D) 40%
A bird flu epidemic causes many people to flee the country, but does not affect labor demand significantly because almost all the goods produced within the country are exported. What happens to current employment and the real wage rate? A) Both employment and the real wage rate would increase. B) Both employment and the real wage rate would decrease. C) Employment would increase and the real wage would decrease. D) Employment would decrease and the real wage would increase.
D) Employment would decrease and the real wage would increase.
How did Keynes propose to solve the problem of high unemployment? A) Increase the growth rate of the money supply. B) Allow wages to decline, so that firms will want to hire more workers. C) Put on wage and price controls, so wages won't rise and firms won't have to lay people off to cut costs. D) Have the government increase its demand for goods and services.
D) Have the government increase its demand for goods and services.
Which of the following is not a category of consumption spending in the national income accounts? A) Consumer durables B) Nondurable goods C) Services D) Housing purchases
D) Housing purchases
Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent increase in the depreciation rate now has what effect on your desired capital stock? A) Raises it, because the future marginal productivity of capital is higher B) Lowers it, because the future marginal productivity of capital is lower C) Raises it, because the user cost of capital is now lower D) Lowers it, because the user cost of capital is now higher
D) Lowers it, because the user cost of capital is now higher
Desired national saving would increase unambiguously if there were A) an increase in both current output and expected future output. B) an increase in both expected future output and government purchases. C) an increase in both expected future output and the expected real interest rate. D) a fall in both government purchases and expected future output.
D) a fall in both government purchases and expected future output.
Data on exports and imports for the United States over the period 1890 to 2008 show that A) the United States had large trade deficits throughout this entire period. B) the United States had large trade surpluses throughout this entire period. C) the percentage of total output exported by U.S. firms fell dramatically during World War I and World War II. D) a higher percentage of U.S. goods was exported in recent years than in earlier years.
D) a higher percentage of U.S. goods was exported in recent years than in earlier years.
An increase in the real wage rate will cause A) the labor demand curve to shift to the right. B) the labor demand curve to shift to the left. C) the quantity of labor demanded to rise. D) a movement along the labor demand curve.
D) a movement along the labor demand curve.
Average labor productivity is the A) amount of workers per machine B) amount of machines per worker C) ratio of employed to unemployed workers D) amount of output per worker
D) amount of output per worker
The CPI may overstate inflation for all the following reasons except A) problems measuring changes in the quality of goods. B) substitution by consumers towards cheaper goods. C) problems measuring the quality of services. D) changes in Social Security benefits.
D) changes in Social Security benefits.
Keynes was motivated to create a macroeconomic theory different from classical theory because A) he believed in government intervention in the economy. B) he believed in the idea of the invisible hand. C) monetary policy was more important than the classicals acknowledged. D) classical theory was inconsistent with the data in the Great Depression.
D) classical theory was inconsistent with the data in the Great Depression.
The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut A) causes inflation. B) causes a current account deficit. C) raises interest rates. D) doesn't affect consumption.
D) doesn't affect consumption.
Aunt Agatha has just left her nephew $5000. The most likely response is for her nephew to A) increase current consumption, but not future consumption. B) decrease current consumption, but increase future consumption. C) increase future consumption, but not current consumption. D) increase both current consumption and future consumption.
D) increase both current consumption and future consumption.
Adam Smith's idea of the "invisible hand" says that given a country's resources and its initial distribution of wealth, the use of markets will A) insulate a nation from the effects of political instability. B) eliminate problems of hunger and dissatisfaction. C) eliminate inequalities between the rich and the poor. D) make people as economically well off as possible.
D) make people as economically well off as possible.
Your boss wants to know if you should lay off any workers. You answer that you should lay off workers if the A) marginal revenue product of labor is greater than the nominal wage rate. B) marginal product of labor is greater than or equal to the real wage rate. C) marginal revenue product of labor is equal to the nominal wage rate. D) marginal product of labor is less than the real wage rate.
D) marginal product of labor is less than the real wage rate.
The principal distinction between positive analysis and normative analysis is that A) positive analysis is useful and normative analysis is not useful. B) positive analysis is optimistic and normative analysis is neutral. C) economists always agree on the conclusions of positive analysis but could disagree on the conclusions of normative analysis. D) positive analysis tells us "what is," but normative analysis tells us "what ought to be."
D) positive analysis tells us "what is," but normative analysis tells us "what ought to be."
If the rate of depreciation increases, then user cost ___ and the desired capital stock ____. A) falls; falls B) falls; rises C) rises; rises D) rises; falls
D) rises; falls
In the saving—investment diagram, an increase in current output would A) shift the saving curve to the left. B) shift the investment demand curve to the left. C) not shift the curves. D) shift the saving curve to the right.
D) shift the saving curve to the right.
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. A) homogeneous labor supply effect B) negative correlation effect C) income effect D) substitution effect
D) substitution effect
You are trying to figure out how much capacity to add to your factory. You will increase capacity as long as A) the expected marginal product of capital is positive. B) the expected marginal product of capital is greater than or equal to the marginal product of capital. C) the expected marginal product of capital is greater than or equal to the expected marginal product of labor. D) the expected marginal product of capital is greater than or equal to the user cost of capital.
D) the expected marginal product of capital is greater than or equal to the user cost of capital.
The fact that the production function relating output to capital becomes flatter as we move from left to right means that A) the marginal product of labor is positive. B) the marginal product of capital is positive. C) there is diminishing marginal productivity of labor. D) there is diminishing marginal productivity of capital.
D) there is diminishing marginal productivity of capital.
If a city has 3293 unemployed people and 73,177 in its labor force, then the city's unemployment rate equals A) 45.0% B) 4.5% C) 4.3% D) 0.45%
Either B or C - answer key says B
Sally will earn $30,000 this year and $40,000 next year. The real interest rate is 20% between this year and next year; she can borrow or lend at this rate. She has no wealth at the start of this year and plans to finish next year having consumed everything she possibly can. She would like to consume the same amount this year as next year. The inflation rate is 0%. (a) How much should Sally save this year? How much will Sally consume in each of the two years? (c) How would your answers change if the real interest rate was 40%?
In general, S = Y(1) - C(1). So in year 2, she has consumption equal to (1 + r)[Y(1) - C(1)] + Y(2) = C(2). Since C(1) = C(2), then (1 + r)[Y(1) - C(2)] + Y(2) = C(2). This can be solved for C(2) to get C(2) = [(1 + r)Y(1) + Y(2)]/(2 + r). (a) With r = 0.2, then C(2) = [(1.2 × $30,000) + $40,000]/2.2 = $34,545 = C(1). Then S = $30,000 - $34,545 = -$4545. So Sally will borrow. (b) With r = 0.4, then C(2) = [(1.4 × $30,000) + $40,000]/2.4 = $34,167 = C(1). Then S = $30,000 - $34,167 = -$4167. So Sally will borrow, but less than before.
In the country of Kwaki, people produce canoes, fish for salmon, and grow corn. In one year they produced 5000 canoes using labor and natural materials only, but sold only 4000, as the economy entered a recession. The cost of producing each canoe was $1000, but the ones that sold were priced at $1250. They fished $30 million worth of salmon. They used $3 million of the salmon as fertilizer for corn. They grew and ate $55 million of corn. What was Kwaki's GDP for the year?
Inventories are valued at the cost of production, so the 1000 canoes in inventory were valued at $1000 each, for a total of $1 million. Four thousand canoes at $1250 each totaled $5 million. Salmon as a final good were worth $27 million (the other $3 million were used up as an intermediate good), and corn worth $55 million was grown. So total GDP (in millions) was $1 + $5 + $27 + $55 = $88 million.
Suppose oil prices fall temporarily, as oil becomes more plentiful. What impact is this likely to have on the production function, the marginal products of labor and capital, labor demand, employment, and the real wage?
More output can now be produced by the same amounts of capital and labor, since oil is more abundant and cheaper. The production function shifts upward, with the marginal products of labor and capital rising. Since the marginal product of labor is higher, so is labor demand. As a result of the shift to the right in the labor demand curve, employment rises, as does the real wage.
In 1991 the federal government changed the withholding amounts for personal taxes. The change meant that people wouldn't have as much withheld from their paychecks. But there was no change in the tax code itself, so the amount of tax due in April 1992 was not changed. How would consumption and saving respond to this withholding change? (Note: you may assume a real interest rate of 0%.)
This is just a Ricardian equivalence example. People would not change their consumption, but would increase saving by the amount of the withholding change, so that they would have the same consumption pattern over time.
Suppose the economy's production function is Y = AK0.3N0.7. Suppose K = 200, N = 2000, and A = 1. Calculate the marginal products of labor and capital.
Using calculus, the marginal product of capital is dY/dK = 0.3A(N/K)0.7 and dY/dN = 0.7A(K/N)0.3. Plugging in the values for N and K gives: MPK = 0.3 (2000/200)0.7 = 1.5; MPN = 0.7 (200/2000)0.3 = 0.35. If you do not use calculus, you can arrive at the same answer (rounded) by plugging the values of for A, N and K into the production function to find Y = 1002.37. Increase K by 1 and recalculate Y; it is now 1003.88. The difference is the MPK = 1003.88 - 1002.37 = 1.51. Increase N by 1 and recalculate Y; it is 1002.73. The difference is the MPN = 1002.73 - 1002.37 = 0.36.
Why is wage and price flexibility crucial to the idea of the "invisible hand?"
Wage and price flexibility is crucial because in a free-market system, changes in wages and prices are the signals that coordinate the actions of people and businesses in the economy.
What is the difference between nominal and real economic variables? Why do economists tend to concentrate on changes in real magnitudes?
nominal variables are in units of money, while real variables are in physical quantities of output. We measure nominal variables using current market prices and real variables using market prices in a given base year. Nominal variables may increase, but you don't know if the increase is due to higher prices and the same quantity, or a higher quantity with unchanged prices; real variables reflect just quantity changes. For the most part, real variables (consumption, investment, and the capital stock) affect each other in the economy, with lesser roles played by nominal variables (money supply, and price level).
