Macro Exam 3

The golden rule level of capital maximizes

consumption

Which economist predicted that humanity's long-run prospect is poverty?

Thomas Malthus

In the steady state in the Solow model, which is NOT one of the uses of new capital?

To replace capital exported to other countries

When does the classical dichotomy not hold?

When not all prices are flexible

For macroeconomists, what distinguishes the short run and the long run

Whether prices are sticky or flexible

Which of the following production functions has constant returns to scale?

Y=K+L

If the marginal product of capital is greater than the depreciation rate, then

increases in the capital-labor ratio will increase output by more than the required increase in deprecation, so consumption also increases

How does the economy move from a short-run equilibrium to its long-run equilibirium

shifts occur in the short-run aggregate supply curve

In the Solow model, which two variables have similar effects on the capital stock per worker?

Deprecation and population growth

Which indicates that firms are NOT engaging in TOO MUCH research activity?

The positive "standing on shoulders' externality is greater than the negative 'stepping on toes' externality

T/F: The evidence is mixed on whether the disparity in income is increasing or decreasing over time

TRUE

If population grows at rate n and workers become more effective at rate g, which variable grows at rate n+g

output

The steady-state consumption is the gap between

output and depreciation

Country A has the production function: Y=F(K,L)=K^(.5)L^(.5). Assume that neither country experiences population growth or technological progress and that 5% of capital depreciates each year. assume further that country A saves 10% of output each year. Suppose that country A starts off with a capital stock per worker of 2. What are the levels of income per worker and consumption per worker?

y=1.4 c=1.27

Which is a valid description of the aggregate demand curve?

It tells us the possible combinations of the price level and output for a given money supply

Assuming that labor and technology are fixed, why is there a limit to capital accumulation?

More capital means more capital must be replaced

In the Solow model with population growth and static technology, what is the Golden Rule condition

That the difference between the marginal product of capital and the depreciation rate equals the population growth.

A high savings rate results in a:

temporarily faster growth

T/F M2 money supply is part of the index of leading economic indicators?

FALSE

If the production function of an economy is y=k^(0.5), what is the steady state level of capital stock for an economy with a savings rate of 0.4 and a deprecation rate of 0.2?

4

An economy without population growth or technological progress has the production function y=20K^(0.5). The current capital stock is 100, the deprecation rate is 10%. For income per person to grow, what rate must the savings rate exceed?

5

What criterion does the NBER's Business Cycle Dating Committee use to determine when the economy goes into recession?

A variety of data and its professional judgement

What happens in an economy that has less capital than the Golden Rule level?

Current generations must sacrifice to maximize future consumption

How do the Solow growth model and endogenous growth model view the marginal product of capital?

The Solow model assumes diminishing returns and the endogenous growth model assumes constant returns to capital

In the Solow growth model, which variable is endogenous

The capital stock

According to the Solow model, if an economy increases its savings rate, then in the new steady state, compared with the old one, the marginal product of capital will be:

lower

A decrease in the savings rate leads to

lower output in the long run

what is the expected result of a decrease in the velocity of money in the long run?

The price level will fall and output will not change