Econ Final

11. True or False: In the real intertemporal model, the representative consumer chooses current and future consumption, and current and future hours of work.

True

18. True or False: In the Solow growth model, the production function exhibits constant returns to scale.

True

In the Solow Model of Economic growth, no matter what the current per worker capital, k = K is, as long N as the economy starts with some non-zero capital stock, or, k ̸= 0, it will always converge to the steady-state (long-run equilibrium) value of capital per worker, k∗. True or False

True

True or False The First Welfare Theorem does not hold when there exists a distorting tax, such as the proportional tax on household's labor income.

True

True or False: If the correlation between an economic variable and real GDP is zero, we say that this variable is acyclical.

True

True or False: In the Solow growth model, growth in output per person can only be sustained if there is growth in total factor productivity that is also sustained.

True

True or False: In the real intertemporal model, if government spending increases, the real interest rate goes up.

True

True or False: In the real intertemporal model, the representative firm chooses the current and future labor inputs, and investment in the current period.

True

True or false: In the context of the Real Intertemporal Model we are currently studying, a temporary increase in government spending G crowds out both private consumption C and private investment I.

True

Any increase in the present value of taxes for the consumer implies 1. an increase in lifetime wealth and an increase in current labor supply. 2. an increase in lifetime wealth and a decrease in current labor supply. 3. a decrease in lifetime wealth and an increase in current labor supply. 4. a decrease in lifetime wealth and a decrease in current labor supply.

a decrease in lifetime wealth and an increase in current labor supply

A steady state is 1. a temporary equilibrium.2. a Pareto Optimum.3. a long-run equilibrium.4. an economy with ongoing fluctuations.

a long-run equilibrium

A temporary increase in income today leads to 1. a relatively small increase in current consumption. 2. a relatively large increase in current consumption. 3. a relatively small decrease in future consumption. 4. a relatively large decrease in future consumption.

a relatively small increase in current consumption.

The property that macroeconomic variables fluctuate together in patterns that exhibit strong regularities is called 1. coincidence. 2. co-movement. 3. correlation. 4. coexistence.

co-movement

7. The saving rate in Solow's exogenous growth model 1. increases with output.2. first decreases, then increases with output. 3. first increases, then decreases with output. 4. is constant.

constant

In the real intertemporal model with investment we ignore the labor/leisure choice. consumer always saves a constant fraction of her income. there are many different consumers. consumer makes choices over current consumption and current leisure, and future consumption and future leisure.

consumer makes choices over current consumption and current leisure, and future consumption and future leisure.

The condition, MRSC,C′ = 1 + r, describes the representative consumer's1. investment decision.2. consumption - savings decision.3. current period work - leisure decision. 4. future period work - leisure decision.

consumption - savings decision

In the real intertemporal model with investment, there is intertemporal substitution with respect to 1. consumption and leisure 2. government spending.3. capital.4. current consumption.

consumption and leisure

13. The Golden Rule of capital accumulation maximizes the steady-state level of 1. output per worker.2. capital per worker.3. consumption per worker. 4. investment per worker.

consumption per worker

In the Solow growth model, long run growth in the standard of living is propelled by 1. government spending.2. growth in the labor force.3. increase in saving rate.4. continued technological improvement.

continued technological improvement.

7. If the correlation between GDP and y is −0.75, we say y is1. procyclical.2. acyclical.3. countercyclical. 4. tricyclical.

countercyclical

If deviations from trend in a macroeconomic variable are negatively correlated with devi- ations from trend in real GDP, that variable is said to be 1. countercyclical. 2. procyclical.3. acyclical.

countercyclical

Imagine that the consumer expects a higher future tax. How would consumption respond to it? 1. current consumption declines(to save to pay for higher future tax). 2. current consumption stays the same.3. current consumption increases.4. tax changes have no effect on consumption.

current consumption declines(to save to pay for higher future tax).

When drawn against the real interest rate, the output supply curve unambiguously shifts to the right if 1. current capital decreases.2. current total factor productivity decreases. 3. future total factor productivity decreases. 4. current or future taxes increase.

current or future taxes increase.

The condition, MRSl,C = w, describes the representative consumer's1. consumption - savings decision.2. current period work - leisure decision3. future period work - leisure decision. 4. investment decision.

current period work - leisure decision

An increase in lifetime wealth 1. increase current labor supply and increase current consumption demand. 2. increase current labor supply and decrease current consumption demand. 3. decrease current labor supply and increase current consumption demand. 4. decrease current labor supply and decrease current consumption demand

decrease current labor supply and increase current consumption demand.

When drawn against the current real wage, the labor demand curve is 1. upward sloping because the marginal product of labor rises with the quantity of labor employed.2. upward sloping because the marginal product of labor declines with the quantity of labor employed. 3. downward sloping because the marginal product of labor declines with the quantity of labor employed. 4. downward sloping because the marginal product of labor rises with the quantity of labor employed.

downward sloping because the marginal product of labor declines with the quantity of labor employed

For a lender, an increase in the real interest rate 1. definitely reduces current consumption and increases future consumption.2. reduces current consumption and has an uncertain effect on future consumption. 3. has an uncertain effect on current consumption and increases future consumption. 4. has an uncertain effect on both current and future consumption.

has an uncertain effect on current consumption and increases future consumption.

In Solow's exogenous growth model, the steady-state growth rate of capital can be in- creased by 1. higher population growth. 2. higher depreciation rate. 3. higher saving rate.4. higher interest rate.

higher population growth.

The demand for goods, given the real interest rate 1. increases more than one-for-one with an increase in current government spending. 2. increases less than one-for-one with an increase in government spending.3. does not increase when government spending increases, due to crowding out.4. increases one-for-one with an increase in government spending.

increases one-for-one with an increase in government spending.

10. In the steady state of Solow's exogenous growth model, an increase in the savings rate 1. increases output per worker and increases capital per worker. 2. increases output per worker and decreases capital per worker. 3. decreases output per worker and increases capital per worker. 4. decreases output per worker and decreases capital per worker.

increases output per worker and increases capital per worker

In the steady state of Solow's exogenous growth model, an increase in total factor produc- tivity 1. increases output per worker and increases capital per worker. 2. increases output per worker and decreases capital per worker. 3. decreases output per worker and increases capital per worker. 4. decreases output per worker and decreases capital per worker.

increases output per worker and increases capital per worker.

An increase in the real interest rate 1. increases savings for both borrowers and lenders.2. increases savings for borrowers, but has an uncertain effect on the savings of lenders. 3. increases savings for lenders, but has an uncertain effect on the savings of borrowers. 4. has an uncertain effect on the savings of both borrowers and lenders.

increases savings for borrowers, but has an uncertain effect on the savings of lenders

A consumer is a borrower if 1. optimum current consumption is less than current disposable income.2. optimum current consumption is greater than current disposable income. 3. future disposable income is greater than current disposable income.4. the consumer's indifference curves are relatively steep.

optimum current consumption is greater than current disposable income.

A consumer is a lender if 1. optimum current consumption is less than current disposable income.2. optimum current consumption is greater than current disposable income. 3. current disposable income is greater than future disposable income.4. the consumer's indifference curves are relatively flat.

optimum current consumption is less than current disposable income

If the savings rate falls in the Solow growth model 1. steady state capital per worker rises.2. the steady state growth rate in output increases. 3. per worker output falls in the steady state.4. per capita consumption falls in the short run.

per worker output falls in the steady state

In the Golden Rule steady state, the marginal product of capital is equal to the 1. savings rate plus the population growth rate.2. population growth rate plus the depreciation rate.3. depreciation rate plus the savings rate.4. savings rate divided by the marginal product of labor.

population growth rate plus the depreciation rate

Recent evidence suggests that output per worker is 1. positively related to both the rate of investment and to the rate of population growth.2. positively related to the rate of investment and negatively related to the rate of population growth. 3. negatively related to the rate of investment and positively related to the rate of population growth. 4. negatively related to both the rate of investment and to the rate of population growth.

positively related to the rate of investment and negatively related to the rate of population growth.

In the data, employment tends to be 1. procyclical and less variable than real GDP.2. procyclical and more variable than real GDP.3. countercyclical and less variable than real GDP. 4. countercyclical and more variable than real GDP.

procyclical and less variable than real GDP

In the data, real consumption tends to be 1. procyclical and less variable than real GDP.2. procyclical and more variable than real GDP.3. countercyclical and less variable than real GDP. 4. countercyclical and more variable than real GDP.

procyclical and less variable than real GDP

In the data, real investment tends to be 1. procyclical and less variable than real GDP.2. procyclical and more variable than real GDP.3. countercyclical and less variable than real GDP. 4. countercyclical and more variable than real GDP.

procyclical and more variable than real GDP

When drawn against current income, the slope of the Cd(r) + Id(r) + G curve is equal to the marginal 1. product of capital.2. product of labor.3. propensity to consume. 4. propensity to save.

propensity to consume

For a borrower, an increase in the real interest rate 1. definitely reduces current consumption and increases future consumption.2. reduces current consumption and has an uncertain effect on future consumption. 3. has an uncertain effect on current consumption and increases future consumption. 4. has an uncertain effect on both current and future consumption.

reduces current consumption and has an uncertain effect on future consumption.

In a two-period model, government spending is financed through 1. taxes and foreign aid.2. taxes and issuing bonds. 3. bonds only.4. taxes only

taxes and issuing bonds

Ricardian equivalence implies 1. that when the government borrows more, the market real interest rate goes up.2. that if the government saves less, then the nation saves less.3. that when taxes are cut people consume more.4. that consumers will save their today's tax cuts to pay their future taxes increases.

that consumers will save their today's tax cuts to pay their future taxes increases.

The Solow residual attempts to measure the amount of output not explained by 1. technological progress.2. the direct contribution of labor and capital. 3. economic projections.4. the amount of a nation's human capital.

the amount of a nation's human capital.

Lifetime wealth is 1. the quantity of assets the consumer has in the current period. 2. current income plus future income.3. current income minus discounted future taxes.4. the present value of disposable income.

the present value of disposable income.

The government's present value budget constraint states that taxes must equal government spending in each period. the present value of government spending must be equal to the present value of consumers' disposable incomes. the present value of government spending must be equal to the present value of taxes. the government may run deficits each and every year, as long as the deficits are sufficiently small.

the present value of government spending must be equal to the present value of taxes.

it grows faster than GDP.2. its deviations from trend generally change before the deviations from trend in GDP do.3. its deviations from trend generally change more that the deviations from trend in GDP.4. its deviations from trend are more often positively correlated to the deviations from trend in GDP.

its deviations from trend are more often positively correlated to the deviations from trend in GDP.

If real GDP helps to predict the path of a particular macroeconomic variable, that macroe- conomic variable is said to be a 1. conventional variable. 2. coincident variable. 3. leading variable.4. lagging variable.

lagging variable.

Savings in our model are 1. actual dollars saved in bank account. 2. postponed consumption

postponed consumption

At the end of the future period, in the real intertemporal model with investment 1. the firm's capital becomes useless and is thrown away.2. the firm's capital is used to produce more capital for the distant future. 3. the firm can convert capital one-for-one into consumption goods.4. the firm's capital is converted into labor.

the firm can convert capital one-for-one into consumption goods

In the two-period model, r denotes1. real income.2. the nominal interest rate.3. the real interest rate. 4. current taxes.

the real interest rate.

Consumption smoothing refers to 1. the tendency of all consumers to choose the same amount of current consumption.2. the tendency of consumers to seek a consumption path over time that is smoother than income. 3. the tendency of consumers to seek an income path over time that is smoother than consumption. 4. consumer's concerns about going heavily into debt.

the tendency of consumers to seek a consumption path over time that is smoother than income.

The Ricardian equivalence theorem implies that government debt policy must be handled correctly for the economy to prosper. the amounts of government spending are neutral. an increase in government spending has no effect on the economy, as long as there is an equal change in taxes. the timing of taxes collected by the government is neutral.

the timing of taxes collected by the government is neutral.

Predicting business cycles is difficult because 1. they are very persistent2. the weather changes unpredictably. 3. statistics lie.4. their frequency is irregular.

their frequency is irregular.

The Solow growth model can account for 1. the patterns of international trade.2. business cycles.3. the role of government in spurring growth.4. why richer countries have higher investment rates.

why richer countries have higher investment rates.

Which of the following is not a correct characterization of the U.S. business cycle? 1. Prices are procyclical.2. Consumption fluctuates less than does real GDP. 3. Investment fluctuates a lot more than real GDP. 4. Average labor productivity is procyclical.

Prices are procyclical

The assumption that current-period labor supply is positively related to the current-period real wage is justified as long as the 1. IE > SE2. IE>SEinthelongrun 3. SE > IE in the short run 4. SE>IEinthelongrun

SE > IE in the short run

The marginal propensity to consume (MPC) is The amount by which current consumption increases when there is a unit increase in aggregate real income Y The amount by which current consumption increases when there is a unit increase in current labor supply The amount by which current consumption decreases when there is a unit increase in aggregate real income Y The amount by which current consumption decreases when there is a unit increase in labor supply

The amount by which current consumption increases when there is a unit increase in aggregate real income Y

Which of the following is NOT a feature of recent U.S. business cycles? 1. The time series of deviations from trend in real GDP is quite choppy.2. The time series of deviations from trend in real GDP is quite smooth.3. There is no regularity to the amplitude of fluctuations in real GDP around the trend. 4. There is no regularity to the frequency of fluctuations in real GDP around trend.

The time series of deviations from trend in real GDP is quite smooth

Which of the following is not a correct characterization of the U.S. business cycle? 1. Employment lags GDP.2. Consumption is coincident. 3. Consumptions leads GDP.

Consumptions leads GDP.

True or False: In the Solow growth model, aggregate output is constant in the steady state.

False

True or False: In the Solow growth model, population always adjusts so that per capita consumption is constant in the steady state.

False

True or False: In the US data, Consumption is a leading economic variable.

False

True or False: In the US data, investment is less variable than consumption

False

True or False: In the context of the Real Intertemporal Model we are currently studying, if the present value of tax decreases, output supply increases. [Hint: think about the relation between lifetime wealth(we) and labor supply.]

False

True or False: The output demand curve slopes upward because of the negative effect of the real interest rate on consumption and investment.

False

True or False: The real wage is countercyclical.

False

In the context of the Real Intertemporal Model we are currently studying, which of the following statements is incorrect ? 1. Household's current labor supply is increasing on w 2. Household's current labor supply is increasing on r 3. Household's current labor supply is decreasing on we 4. Household's demand for current consumption goods is decreasing on r 5. Household's demand for current consumption goods is increasing on we 6. Household's demand for current consumption goods is decreasing on we.

Household's demand for current consumption goods is decreasing on we

The Malthusian model performs poorly in explaining economic growth after the 1. French Revolution.2. American Revolution.3. Industrial Revolution.4. Bio-technology Revolution.

Industrial Revolution

If the interest rate goes up, what happens to the investment demand curve? 1. It shifts to the right.2. It shift to the left.3. Investment curve does not shift, stays put.

Investment curve does not shift, stays put.

Why don't consumers work in the two-period model? 1. It's a convenient simplification.2. work-leisure decision doesn't affect consumption-saving decision at all. 3. We don't know how to include workers in the model.

It's a convenient simplification

Both the Golden Rule quantity of capital per worker (kg∗r) and the Golden Rule savings rate (s∗gr) are quantities that Maximize output per worker in the steady state Maximize income per worker in the steady state Maximize consumption per worker in the steady state Maximize labor supply per worker in the steady state

Maximize consumption per worker in the steady state

The Solow model emphasizes the role of which of the following factors of production? 1. Land2. Labor3. Capital4. Natural resources

Natural resources

An increase in second-period income results in an increase in first-period consumption, an increase in second-period consumption, and an increase in saving. an increase in first-period consumption, a decrease in second-period consumption, and an increase in saving. a decrease in first-period consumption, an increase in second-period consumption, and an increase in saving. an increase in first-period consumption, an increase in second-period consumption, and a decrease in saving.

an increase in first-period consumption, an increase in second-period consumption, and a decrease in saving.

1. The defining feature of business cycles is that they 1. are always bad.2. represent only the trend of real GDP in the economy.3. are fluctuations about trend in real GDP.4. measure prospects for long-run economic growth in the economy.

are fluctuations about trend in real GDP

Employment also tends to 1. Be a leading variable.2. be a coincident variable.3. be a lagging variable.4. sometimes lead, sometimes lag the cycle.

be a lagging variable.

When drawn against the real interest rate, the output supply curve is upward sloping because labor supply is 1. increasing in the real interest rate and labor demand is independent of the real interest rate. 2. decreasing in the real interest rate and labor demand is independent of the real interest rate. 3. independent of the real interest rate and labor demand is increasing in the real interest rate. 4. independent of the real interest rate and labor demand is decreasing in the real interest rate.

increasing in the real interest rate and labor demand is independent of the real interest rate.

We use a two-period model because 1. the business cycle has two phases: contraction and recovery.2. it is the simplest dynamic model, which helps analyze consumer's dynamic decision(saving). 3. we want to make a distinction between young and old households.4. this is the horizon of the politicians that formulate policy.

is the simplest dynamic model, which helps analyze consumer's dynamic decision(saving).

It is useful to study the Solow growth model because 1. it provides a useful account of the reasons for population growth.2. it is useful in understanding the sources of economic growth after 1800. 3. it has a steady state. 4. it can help us understand the reasons for population control.

it is useful in understanding the sources of economic growth after 1800.

The consumer's lifetime budget constraint states that the present value of lifetime consumption must be equal to the present value of lifetime gross income. the present value of lifetime consumption must be equal to the present value of lifetime disposable income. the present value of lifetime taxes to be paid by the consumer must be equal to the present value of government spending. 4. lifetime consumption equals lifetime income

the present value of lifetime consumption must be equal to the present value of lifetime disposable income.

In Solow's exogenous growth model, the economy reaches a stable steady state because 1. there is diminishing return on capital.2. capital is growing at a constant rate.3. the substitution effect is stronger than the income effect. 4. conditional convergence holds.

there is diminishing return on capital

3. Macroeconomic forecasting is made more difficult due to the fact that 1. deviations from trend in real GDP are persistent. 2. turning points are hard to predict.3. there are no comovements.4. consumption is smooth.

turning points are hard to predict

19. The Ricardian equivalence theorem says 1. whatever the level of government expenses, consumption is the same.2. whatever the timing of taxes, consumption is the same.3. higher government expenses reduce consumption.4. an increase in current consumption has to lead to a decrease in future consumption.

whatever the timing of taxes, consumption is the same.

Business cycle persistence refers to the property that real GDP is rarely exactly at trend. booms and recessions last a long time. when real GDP is above trend, it tends to stay above trend, and when it is below trend, it tends to stay below trend. 4. business cycles are persistently hard to predict.

when real GDP is above trend, it tends to stay above trend, and when it is below trend, it tends to stay below trend.

A consumer may increase her saving by 1. working more hours and consuming more goods in the present period. 2. working more hours and consuming fewer goods in the present period. 3. working fewer hours and consuming more goods in the present period. 4. working fewer hours and consuming fewer goods in the present period.

working more hours and consuming fewer goods in the present period