Econ 304 Midterm #2

Output per worker is 50, the saving rate is 15 percent, the population is growing at one percent, depreciation is 9 percent, and the capital-labor ratio is 80. The economy is in the steady state Capital-labor ratio is increasing Capital-labor ratio is decreasing None of the above

Capital-labor ratio is decreasing

With high unanticipated inflation ________. stock market investors are always worse off than consumers and households producers are always worse off than consumers creditors are always worse off than debtors all of the above none of the above

creditors are always worse off than debtors

The loss of capital due to the wearing out of machines is known as ________. saving investment consumption depreciation

depreciation

In the Solow growth model changes in the capital stock are caused by ________. the quantity of labor depreciation and investment depreciation and entrepreneurship depreciation and the quantity of labor

depreciation and investment

Assume there is no population growth. If capital per-worker is rising, then ________. depreciation is equal to investment depreciation is greater than investment depreciation is less than investment depreciation is less than consumption

depreciation is less than investment

Assume that an economy is in equilibrium when the arrival of immigrants causes an increase in the supply of labor. Assuming that the supply of capital remains unchanged, which of the following has decreased? the share of capital income in national income the share of labor income in national income national income the rental price of capital none of the above

none of the above

Capital per person k is higher in Japan than in the United States. As a result ________. per capita income is higher in Japan total factor productivity is higher in Japan the marginal product of capital is higher in Japan all of the above none of the above

none of the above

Consumption expenditures decrease when ________. the real interest rate falls disposable income increases autonomous consumption increases all of the above none of the above

none of the above

If the government reduces spending ________. the IS curve will shift to the right output will increase if interest rates remain fixed consumption will increase all of the above none of the above

none of the above

Increases in ________ typically lead to decreases in ________. the interest rate; saving disposable income; consumption autonomous consumption; consumption all of the above none of the above

none of the above

The IS curve ________ when the real interest rate increases. shifts to the right shifts to the left shifts up all of the above none of the above

none of the above

The Solow model is ________. the basic model of how technology changes over time the foundation for the classical economic thought of Adam Smith one of the dominant explanations of the business cycle all of the above none of the above

none of the above

An economy's total labor income is $2 trillion, and total capital income is $1 trillion. In the Cobb-Douglas production function, the exponent on capital is ________. two-thirds one-half one-third 0.3 none of the above

one-third

In the Solow model, which of the following is an endogenous variable? output per worker government spending the saving rate the depreciation rate

output per worker

The direct cause of the hyperinflation that plagued Zimbabwe in the 2000s is ________. printing of too much money by the central bank government expenditures greatly above revenues outlawing of price increases on many commodities allowing the use of foreign currencies the issuance of a $100 billion bank note

printing of too much money by the central bank

In the Solow model, which of the following is an exogenous variable? productivity the capital-labor ratio consumption per worker investment per worker

productivity

The IS curve ________. shifts to the right when autonomous consumption increases shifts up when the real interest rate increases shifts to the left when autonomous investment increases all of the above none of the above

shifts to the right when autonomous consumption increases

With increases in inflation, demand for money that does not earn a return decreases. Carrying less cash in our pockets means higher ________. shoe-leather costs menu costs capital gain tax bills all of the above none of the above

shoe-leather costs

Government saving refers to ________. Assume there is no government debt. tax revenues minus transfers minus government purchases tax revenues plus transfers minus government consumption the saving rate times transfers national plus private saving none of the above

tax revenues minus transfers minus government purchases

If an economy invests more than it loses through depreciation ________. the saving rate will fall the saving rate will rise the quantity of labor will fall the capital stock will expand

the capital stock will expand

Assume that the number of workers is fixed. The per-worker production function flattens out due to ________. the negative relationship between price and quantity demanded the positive relationship between price and quantity demanded the diminishing marginal product of capital an increase in the general level of prices

the diminishing marginal product of capital

If an economy initially starts away from the steady state ________. output will gradually fall over time the economy will converge to the steady state in the long-run consumption spending must be greater than investment spending consumption spending must rise

the economy will converge to the steady state in the long-run

Assume that an economy is in equilibrium when technological progress causes an increase in total factor productivity. Assuming that the supplies of capital and labor remain unchanged, which of the following has increased? the real wage the share of capital income in national income the share of labor income in national income all of the above none of the above

the real wage

When firms spend more on additional holdings of raw materials, parts and finished goods ________. they are increasing their fixed investment they are increasing their inventory investment they are increasing their private consumption all of the above none of the above

they are increasing their inventory investment

The Federal Reserve System consists of ________. eleven district banks and a board of governors ten district banks and the FOMC eleven district banks twelve district banks and a board of governors none of the above

twelve district banks and a board of governors

The per-worker production function in the Solow growth model is ________. upward-sloping downward-sloping vertical horizontal

upward-sloping

Strong evidence of convergence exists for ________. wealthy nations that belong to the Organization for Economic Cooperation and Development both rich and poor nations sub-Saharan African economies and the economies of North America European and Caribbean economies

wealthy nations that belong to the Organization for Economic Cooperation and Development

Given the production function Y = AK^0.3L^0.7, if an economy's capital per worker k is $27 thousand, and its total factor productivity A is 0.5, then output per worker is (approximately) ________. $13,500 $40,500 $3,000 $5,000 $1,500

$1,500

If output per worker in a steady state is $30,000, depreciation is 13%, the population growth rate is two percent, and the saving rate is 20%, what is the steady state capital-labor ratio? $10,500 $85,714 $22,500 $40,000

$40,000

Total planned expenditure (equals total output) is 14,000 when autonomous consumption expenditure is 450. When autonomous consumption expenditure falls to 400, total planned expenditure (equals total output) is 13,900. The marginal propensity to consume is 0.89 0.75 0.99 0.44 0.5

0.5

In an economy with production function Y = 1.5 ×K0.3 L0.7, K = 343, and L = 512. If factor markets are in equilibrium, then the rental price of capital is (approximately) ________, and the real wage is (approximately) ________. 0.5; 0.8 7; 8 0.9; 1.35 1.4; 0.4 0.6; 0.9

0.6; 0.9

Consumption expenditure is 15,000, government purchases are 5,000, planned investment spending is 4,000. If total output is 26,500, then unplanned inventory investment is ________. negative 500 2,500 3,500 4,000 negative 450

2,500

When a particular firm is fully utilizing its capital, its output is given by Y = 10 ×L0.5 . The cost of labor is $1 per unit. To maximize profit, how many units of labor should this firm use? You may use the following approximation formula: (L+1)0.5-L0.5LaTeX: \approx ≈ 0.5L-0.5 25 5 3.16 100 50

25

In a steady-state economy with 4 percent population growth, capital per worker is 90, the saving rate is 25 percent, and the depreciation rate is 11 percent. The level of output per worker is ________. 195 54 38 35

54

In a steady-state economy with no population growth, output per worker is 33, the saving rate is 20 percent, and the depreciation rate is 11 percent. The level of capital per worker is ________. 64 60 39 28

60

How can the U.S. federal government induce increases in the national saving rate? implementing a value added tax lowering the capital gains tax reducing budget deficits all of the above none of the above

all of the above

Countries with different initial levels of per capita income may gravitate to a similar level of per capita income. Economists call this phenomenon ________. convergence simulation gravitation depreciation

convergence

Inflation ________. is costly because the classical dichotomy may not always hold that is anticipated (or expected) can be costly is costly for many reasons but chief among them is that inflation makes it more difficult to plan for the future all of the above none of the above

all of the above

M1 differs from M2 because ________. M2 includes components that are less liquid than any component of M1 M1 does not include savings deposits and M2 does M1 is included in M2 but M2 has more components all of the above none of the above

all of the above

Money is ________. an asset a unit of measure a means to store wealth all of the above none of the above

all of the above

The Fed's narrowest measure of money is ________. M1 M2 M3 all of the above none of the above

M1

As of 2013, the outstanding U.S. currency is more than $1 trillion, which suggests that the typical U.S. citizen holds $3,600 in cash. Is this an accurate inference? Why? Yes; because dividing total currency by total U.S. population roughly works out to $3,600 per person. No; because criminals and foreigners hold large sums of dollars, so the average citizen holds far less. No; because the average citizen probably does not have $3,600 in her checking account. Yes; because the Fed rarely makes accounting mistakes when computing M1. none of the above

No; because criminals and foreigners hold large sums of dollars, so the average citizen holds far less.

Planned expenditures ________. are directly affected by government purchases increase when there is a reduction in taxes decrease when disposable income decreases all of the above none of the above

all of the above

Private saving refers to ________. after-tax income minus consumption expenditures a flow variable which adds to the stock of wealth the private saving rate times disposable income all of the above none of the above

all of the above

Real capital income is given by ________. MPK × K capital share of income × output per unit of capital × capital capital share of income × output all of the above none of the above

all of the above

Profit maximization implies that firms will want to ________. accumulate capital while the MPK is greater than the real wage accumulate capital while the MPK is greater than the rental price of capital accumulate labor while the MPK is greater than the rental price of capital accumulate labor while the MPK is greater than the real wage none of the above

accumulate capital while the MPK is greater than the rental price of capital

Real labor income is given by ________. MPL × L labor share of income × labor productivity × labor labor share of income × output all of the above none of the above

all of the above

Profit maximization implies that firms will want to ________. accumulate labor while the MPL is greater than the real wage accumulate capital while the MPK is lower than the rental price of capital accumulate labor while the MPK is greater than the rental price of capital accumulate capital while the MPL is greater than the real wage none of the above

accumulate labor while the MPL is greater than the real wage

The IS curve shows the relationship between aggregate output and the real interest rate when the goods market is in equilibrium tells us that increases in autonomous consumption, investment, or government purchases raise output for any real interest rate tells us that a decrease in taxes or in financial frictions leads to an increase in output for any given real interest rate all of the above none of the above

all of the above

The real interest rate ________. is the cost of borrowing adjusted for inflation keeps the market for saving and investment in equilibrium describes the real benefit of saving all of the above none of the above

all of the above

Total planned expenditure in a closed economy includes planned investment spending consumption expenditures government purchases all of the above none of the above

all of the above

What do we learn from the shape of the Cobb-Douglas production function? its slope falls as capital gets added (holding labor constant) the marginal product of capital declines as the capital stock increases (holding labor constant) there are diminishing returns to capital all of the above none of the above

all of the above

Which of the following is true about per capita income? it is an approximate measure of how rich or poor a country is it is the same as income per worker only if everyone in the economy is assumed to work it is the product of TFP and capital per worker only if everyone in the economy is assumed to work all of the above first and second statements

all of the above

On the Solow Diagram, an increase in productivity is shown by ________. an upward shift of the depreciation/dilution line an upward shift of the investment curve a downward shift of the depreciation/dilution line a downward shift of the investment curve

an upward shift of the investment curve

On the Solow Diagram, an increase in the saving rate is shown by ________. an upward shift of the depreciation/dilution line an upward shift of the investment curve an upward shift of the per-worker production function a downward shift of the investment curve

an upward shift of the investment curve

In the IS model, assuming that the real interest rate does not change, an increase in ________ leads to an increase in the equilibrium level of ________. autonomous investment; consumption autonomous consumption; investment taxes; investment all of the above none of the above

autonomous investment; consumption

Assume there is no population growth. If depreciation is equal to investment ________. capital per-worker rises over time capital per-worker is stable capital per-worker falls over time capital per worker equals saving

capital per-worker is stable

A higher rate of saving at the national level will, in the long-run ________. cause a decrease in levels of capital and output have no effect on levels of capital and output lead to an increase in population growth cause an increase in levels of capital and output

cause an increase in levels of capital and output

Which of these transactions results in an increase in M1? withdrawal of $100 cash from your checking account certificate of deposit matures, adding $520 to your checking account depositing a bank loan of $400 into your savings account depositing a $300 paycheck into your savings account none of the above

certificate of deposit matures, adding $520 to your checking account

When an economy experiences a one-time increase in productivity, there is an immediate increase in ________. the saving rate the capital-labor ratio the depreciation rate consumption per worker

consumption per worker

When an economy experiences a one-time increase in productivity, there is an increase in the long-run, steady state value of ________. the growth rate of output the depreciation rate consumption per worker the saving rate

consumption per worker

Suppose an economy is in a steady state, then its saving rate falls, once and permanently. As the economy approaches its new long-run steady state, consumption per worker is ________. falling rising unaffected either rising or falling

falling

The root cause of the hyperinflation that plagued Zimbabwe in the 2000s is ________. printing of too much money by the central bank government expenditures greatly above revenues outlawing of price increases on many commodities allowing the use of foreign currencies the issuance of a $100 billion bank note

government expenditures greatly above revenues

Other things the same, in the Solow model, a higher rate of population growth ________ steady state growth rate of output per worker. leads to a higher leads to a lower has no effect on the has an ambiguous effect on the

has no effect on the

Money is not ________. income because the former is a stock measure and the latter a flow wealth because the latter is generally used to procure the former as desirable as barter because use of money requires a double coincidence of wants all of the above none of the above

income because the former is a stock measure and the latter a flow

Which of the following is true about total factor productivity (TFP)? it can be measured just like capital and labor it cannot be directly measured so it has to be calculated from given values of capital, labor and output while it cannot be measured directly, it has an exponent of 0.3 in the Cobb-Douglas production function while it cannot be measured directly, it has an exponent of 0.7 in the Cobb-Douglas production function none of the above

it cannot be directly measured so it has to be calculated from given values of capital, labor and output

In the long run, if government increases spending ________. For the long run we typically assume that prices are fully flexible and output is determined by the technology and amount of factors of production (capital and labor). interest rates decrease it crowds out private investment saving increases all of the above none of the above

it crowds out private investment

Subject to a few legal and practical restrictions, anything may be exchanged for anything else. The distinctive advantage of money is that ________. it is likely to retain its value, whether it is kept or exchanged it has little, if any, use other than exchange it can generate income while it is kept it is likely to be accepted by everyone in exchange for anything none of the above

it is likely to be accepted by everyone in exchange for anything

Other things the same, in the Solow model, a higher rate of population growth ________ the steady state level of output per worker . leads to an increase in has no effect on has an ambiguous effect on leads to a decrease in

leads to a decrease in

Other things the same, in the Solow model, a higher rate of population growth ________ steady state growth rate of output. leads to a higher leads to a lower has no effect on the has an ambiguous effect on the

leads to a higher

An increase in the saving rate results in a higher steady state ________. growth rate of capital growth rate of output per worker level of consumption per worker level of capital per worker

level of capital per worker

Inflation ________. is more costly when it is anticipated than when it comes as a surprise makes it more difficult to plan for the future, whether it is a surprise or not induces distortions in the money and goods market but not the labor market all of the above none of the above

makes it more difficult to plan for the future, whether it is a surprise or not

Following an increase in the saving rate, steady state consumption per worker ________. increases decreases is unaffected may either rise or fall

may either rise or fall

The FOMC ________. meets four times a year to decide on how to conduct open market operations that influence the money supply meets six times a year to decide on how to conduct open market operations that influence the money supply and interest rates meets eight times a year to decide on how to conduct open market operations that influence the money supply and interest rates meets twelve times a year to decide on how to conduct open market operations that influence interest rates none of the above

meets eight times a year to decide on how to conduct open market operations that influence the money supply and interest rates