ECON 3080 Final

In the Solow growth model of an economy with population growth but no technological change, the break-even level of investment must do all of the following except:

equal the marginal productivity of capital (MPK).

The equilibrium of the Keynesian cross shows:

equality of planned expenditure and income in the short run.

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

g

An increase in the elderly population of a country affects fiscal policy most directly because:

governments provide pensions and health care for the elderly.

According to the quantity theory of money, when velocity is constant, if output is higher, ______ real balances are required, and for fixed M this means ______ P.

higher; lower

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

in the long run but lead to unemployment in the short run.

The government-purchases multiplier indicates how much ______ change(s) in response to a $1 change in government purchases.

income

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______, and the aggregate demand curve shifts ______.

lower; inward

Monetary neutrality, the irrelevance of the money supply in determining values of _____ variables, is generally thought to be a property of the economy in the long run.

real

According to the theory of Ricardian equivalence, tax cuts combined with no plans to reduce government spending ______ public saving and ______ private saving.

reduce; increase

An increase in the interest rate:

reduces planned investment because the interest rate is the cost of borrowing to finance investment projects.

If the Fed reduces the money supply by 5 percent, then the real interest rate will:

rise in the short run but return to its original equilibrium level in the long run.

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, public saving:

rises by $100 billion

To maintain a fixed-exchange-rate system, if the exchange rate (foreign currency/local currency) moves below the fixed-exchange-rate level, then the central bank must:

sell foreign currency from reserves.

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

sf (k) / (δ + n + g).

Investment per worker (i) as a function of the saving ratio (s) and output per worker (f (k)) may be expressed as:

sf (k).

The Mundell-Fleming model is a ______ model for a ______ open economy.

short-run; small

Most spells of unemployment are ______ term, and most weeks of unemployment are attributable to ______-term unemployment.

short; long

If a war destroys a large portion of a country's capital stock but the saving rate is unchanged, the Solow model predicts that output will grow and that the new steady state will approach:

the same level of output per person as before.

All of the following are causes of structural unemployment except:

unemployment insurance.

Ricardian equivalence refers to the same impact of financing government:

whether by debt or taxes.

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals:

$600 billion

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals:

$800 billion

In the Solow growth model, where s is the saving rate, y is output per worker, and i is investment per worker, consumption per worker (c) equals:

(1 - s) y

If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to ______ multiplied by B.

(cr + 1) / (cr + rr)

Percentage change in P is approximately equal to the percentage change in:

M minus the percentage change in Y plus the percentage change in velocity

An assumption of _______ is more plausible for studying the short-run behavior of the economy, while an assumption of ______ is more plausible for studying the long-run, equilibrium behavior of the economy.

Sticky prices; flexible prices

Starting from the natural level of output, an unexpected monetary contraction will cause output and the price level to ______ in the short run; and in the long run the expected price level will ______, causing the level of output to return to the natural level.

decrease; decrease

In the Solow growth model with population growth and labor-augmenting technological change, the break-even level of investment must cover:

depreciating capital, capital for new workers, and capital for new effective workers.

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

downward and to the left.

Paying efficiency wages helps firms reduce the problem of moral hazard by:

encouraging unsupervised workers to maintain a high level of productivity.

In the two-sector endogenous growth model, the saving rate (s) affects the steady-state:

level of income.

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:

-$10 billion

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is:

-4 percent

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

0

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

0

If the fraction of employed workers who lose their jobs each month (the rate of job separation) is 0.01 and the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is:

10 percent.

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y - T). Taxes (T) are equal to 1,000. Government spending is 600. In this case, equilibrium investment is:

1500

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + t1Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.25, then consumption decreases by:

175

If nominal GDP grew by 5 percent and real GDP grew by 3 percent, then the GDP deflator grew by approximately ______ percent.

2

If the unemployment rate is 6 percent and the number of employed is 188 million, then the labor force equals ______ million.

200

If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by:

300.

If 7 million workers are unemployed, 143 million workers are employed, and the adult population equals 200 million, then the unemployment rate equals approximately ______ percent.

4.7

If the labor force is growing at a 3 percent rate and the efficiency of a unit of labor is growing at a 2 percent rate, then the number of effective workers is growing approximately at a rate of:

5 percent

According to the quantity theory of money and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:

5%

Suppose that over the course of a year 100 people are unemployed for 4 weeks each (the short-term unemployed), while 10 people are unemployed for 52 weeks each (the long-term unemployed). Approximately what percentage of the total spells of unemployment were attributable to the long-term unemployed?

9 percent

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

K and E are doubled.

An increase in consumer saving for any given level of income will shift the:

IS curve downward and to the left.

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the labor market were always in equilibrium, this would lead to:

a lower real wage and no change in unemployment.

In a small open economy, if the world interest rate is r1, then the economy has:

a trade surplus

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:

aggregate demand equals short-run aggregate supply.

Which of the following will shift the aggregate supply curve up to the left?

an increase in the expected price level+*/

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

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

The consumption function in the Solow model assumes that society saves a:

constant proportion of income.

All of the following are arguments against Ricardian equivalence except:

consumers are rational and forward-looking in consumption decision-making.

In the IS-LM model, changes in taxes initially affect planned expenditures through:

consumption

According to the model developed in Chapter 3, when taxes decrease without a change in government spending:

consumption increases and investment decreases

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will:

increase by more than $1 million

An effective policy to reduce a trade deficit in a small open economy would be to:

increase taxes

If nominal GDP increased by 5 percent and the GDP deflator increased by 3 percent, then real GDP______ by ______ percent.

increased; 2

If an economy with no population growth or technological change has a steady-state MPK of 0.125, a depreciation rate of 0.1, and a saving rate of 0.225, then the steady-state capital stock:

is less than the Golden Rule level.

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM* curve:

is vertical because the exchange rate does not enter into the LM* equation.

By paying efficiency wages, firms contribute to higher unemployment because they:

keep the wage above the equilibrium level.

Assume that a country experiences a reduction in productivity that lowers the marginal product of labor for any given level of labor. In this case, the:

labor demand curve shifts downward and to the left.

When firms experience unplanned inventory accumulation, they typically:

lay off workers and reduce production.

In the two-sector endogenous growth model, the fraction of labor in universities (u) affects the steady-state:

level of income, growth rate of income, and growth rate of the stock of knowledge.

If a country has a high rate of inflation relative to the United States (holding the real exchange rate fixed), the dollar will buy:

more of the foreign currency over time

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

n; n

With population growth at rate n and labor-augmenting technological progress at rate g, the Golden Rule steady state requires that the marginal product of capital (MPK):

net of depreciation be equal to n + g.

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the real wage were rigid, this would lead to:

no change in the real wage and a rise in unemployment.

The concept of monetary neutrality in the classical model means that an increase in the money supply growth rate will increase:

nominal interest rates

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

output and employment will increase in the short run.

According to the sticky-price model, deviations of output from the natural level are _____ deviations of the price level from the expected price level.

positively associated with

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

prices but not level of output.

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the IS* curve:

slopes downward and to the right because the higher the exchange rate, the lower the level of net exports and, therefore, of short-run equilibrium income in the goods market.

Unemployment insurance increases the amount of frictional unemployment by:

softening the economic hardship of unemployment.

If an economy is in a steady state with no population growth or technological change and the marginal product of capital is less than the depreciation rate:

steady-state consumption per worker would be higher in a steady state with a lower saving rate.

In the short run, if the price level is greater than the expected price level, then in the long run the aggregate:

supply curve will shift upward.

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

the efficiency of labor.

In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short-run equilibrium:

the exchange rate will rise, but income will remain unchanged.

Which of the following is an example of a demand shock?

the introduction and greater availability of credit cards

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

the population growth rate.

When the real wage is above the level that equilibrates supply and demand:

the quantity of labor supplied exceeds the quantity demanded.

According to the imperfect-information model, in countries in which there is a great deal of variability of prices:

the response of output to unexpected changes in prices will be relatively small.