Macro Multiple Choice- Test 2

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

$1 billion; more than $1 billion

In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows at a 3 percent rate, then in the steady state, output per actual worker grows at a ______ percent rate.

0

If the U.S. production function is Cobb-Douglas with capital share 0.3, output growth is 3 percent per year, depreciation is 4 percent per year, and the capital-output ratio is 2.5, the saving rate that is consistent with steady-state growth is:

17.5 percent.

If y = k1/2, the country saves 10 percent of its output each year, and the steady-state level of capital per worker is 4, then the steady-state levels of output per worker and consumption per worker are:

2 and 1.8, respectively.

Making use of Okun's law, it may be computed that if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about:

5 percent in both the short run and the long run.

An increase in income generated by an increase in the country risk premium will not occur if there is a(n) ______ sufficient to offset the decline in the demand for money caused by the higher risk premium.

??????

Exhibit:RiskPremium A small open economy with a floating exchange rate is initially in equilibrium at A with IS1*, LM1*. If there is an increase in the risk premium, then LM1* will shift to _____ and IS1* will shift to _____. (Picture not shown)

?????????

Exhibit: Supply Shock (Exhibit: Supply Shock) Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point:

A

The productivity slowdown that began in the 1970s has been attributed, at least partly, to each of the following except:

a decline in the number of workers in the labor force.

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model with floating exchange rates, lead to:

a fall in consumption and income.

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

decrease; decrease; decrease; decrease

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment ______, and this shifts the expenditure function ______, thereby decreasing income.

decreases; downward

In a short-run model of a large open economy with a floating exchange rate, net capital outflow ______ as the domestic interest rate increases and is just equal to ______.

decreases; the decrease in net exports.

Assuming there is perfect capital mobility, compared to a large open economy, a small open economy is one in which the:

domestic interest rate equals the world interest rate.

The number of effective workers takes into account the number of workers and the:

efficiency of each worker.

If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will:

fall and in the long run prices will remain unchanged.

If investors in a large open economy become more willing to substitute foreign and domestic assets, then this will make the net capital outflow function:

flatter, and the slope of the IS curve flatter.

Most economists believe that prices are:

flexible in the long run but many are sticky in the short run.

The "impossible trinity" refers to the idea that it is impossible for a country to simultaneously have:

free capital flows, a fixed exchange rate, and an independent monetary policy.

If the production function exhibits increasing returns to scale in the steady state, an increase in the rate of growth of population would lead to:

growth in total output and growth in output per worker.

If money demand is infinite below some certain r (e.g., r*) and zero above r*, then the LM curve is ______ and ______ policy has no effect on output.

horizontal; monetary

The Solow growth model describes:

how saving, population growth, and technological change affect output over time.

In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium:

imports will decrease and exports will decrease by an equal amount.

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.

An increase in government spending raises income:

in the short run, but leaves it unchanged in the long run, while lowering investment.

Most economists believe:

in view of what economists now know about monetary and fiscal policy, and in view of institutional changes, a repeat of the Great Depression is unlikely.

If a larger share of national output is devoted to investment, starting from an initial steady-state capital stock below the Golden Rule level, then productivity growth will:

increase in the short run but not in the long run.

Exhibit: The Capital-Labor Ratio In this graph, starting from capital-labor ratio k1, the capital-labor ratio will: (Picture is not accurate)

increase.

An increase in investment demand for any given level of income and interest rates—due, for example, to more optimistic "animal spirits"—will, within the IS-LM framework, ______ output and ______ interest rates.

increase; raise

In the Solow growth model with population growth but no technological progress, increases in capital have a positive impact on steady-state consumption per worker by _____, but have a negative impact on steady-state consumption per worker by _____.

increasing output; increasing output required to replace depreciating capital.

A liquidity trap occurs when:

interest rates fall so low that monetary policy is no longer effective.

Exhibit: IS-LM Monetary Policy (Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in the money supply would generate the new equilibrium combination of interest rate and income: (Picture not shown)

r2,Y2

(Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in the money supply would generate the new equilibrium combination of interest rate and income: (Picture not shown)

r3, Y3

Exhibit: IS-LM Fiscal Policy (Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income: (Picture not shown)

r3,Y2

For any given interest rate and price level, an increase in the money supply:

raises income

Those economists who believe that monetary policy is more potent than fiscal policy argue that the:

responsiveness of money demand to the interest rate is small.

A tax cut combined with tight money, as was the case in the United States in the early 1980s, should lead to a:

rise in the real interest rate and a fall in investment.

If the marginal product of capital net depreciation equals 8 percent, the rate of growth of population equals 2 percent, and the rate of labor-augmenting technical progress equals 2 percent, to reach the Golden Rule level of the capital stock, the ____ rate in this economy must be _____.

saving; increased.

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.

sell; LM

In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income.

sell; rises; decrease

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

unplanned inventory investment.

The analysis in Chapter 9 of the current capital stock in the United States versus the Golden Rule level of capital stock shows that the capital stock in the United States is:

well below the Golden Rule level.

If all wage income is consumed, all capital income is saved, and all factors of production earn their marginal products, then:

wherever the economy starts out, it will reach a steady-state level of capital stock equal to the Golden Rule level.

Exhibit: IS*-LM* (Exhibit: IS*-LM*) A small open economy with a floating exchange rate is initially at equilibrium A with IS*1, LM*1, equilibrium exchange rate e2, and equilibrium output Y1. If there is an increase in government spending to IS*2, the new equilibrium will be at ____, holding everything else constant.

B

(Exhibit: Supply Shock) Assume that the economy starts at point A and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point ______ represents the short-run equilibrium immediately following the drought and point ______ represents the eventual long-run equilibrium.

B; A

(Exhibit: IS*-LM*) A small open economy with a floating exchange rate is initially at equilibrium A with IS1*, LM1*, equilibrium exchange rate e2, and equilibrium output Y1. If there is a monetary expansion to LM 2* , the new equilibrium will be at ____, holding everything else constant.

D

If money demand does not depend on income, then the ______ curve is ______.

LM; horizontal

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?

The central bank's foreign-currency reserves are increasing.

If Y = K0.3L0.7, then the per-worker production function is:

Y/L = (K/L)0.3.

Exhibit: Keynesian Cross (Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are:

Y2 and PE2.

If the government wants to raise investment but keep output constant, it should:

adopt a loose monetary policy and a tight fiscal policy.

In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income:

and net exports both to rise.

The Mundell-Fleming model assumes that:

as in the IS-LM model, prices are fixed.

The LM curve generally determines:

both income and the interest rate.

Both Keynesians and supply-siders believe a tax cut will lead to growth:

but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects.

To maintain a fixed-exchange-rate system, if the exchange rate moves below the fixed-exchange-rate level, then the central bank must:

buy foreign currency

The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services:

by lowering the interest rate so that investment spending increases.

In a small open economy with a floating exchange rate, the supply of real money balances is fixed and a rise in government spending:

cannot change the interest rate so that net exports must fall to maintain equilibrium in the goods market.

The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would:

decrease by 1 percent.

If the production function is Y = AK2/3L1/3 in the land of Solovia, and the labor force increases by 5 percent while capital is constant, labor productivity will:

decrease by 3.33 percent.

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

investment rises but consumption falls.

Exhibit: Steady-State Capital-Labor Ratio In this graph, the capital-labor ratio that represents the steady-state capital-ratio is:

k2.

An alternative to Prescott's explanation of the cyclical behavior of the Solow residual is that it is the result of:

labor hoarding in recession and cyclical mismeasurement of output.

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

level of income.

The intersection of the IS* and LM* curves shows the ______ and the ______ at which both the goods market and the money market are in equilibrium.

level of output; exchange rate

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.

lower; lower

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, ______ output and ______ interest rates.

lower; raise

If an economy moves from a steady state with positive population growth to a zero population growth rate, then in the new steady state, total output growth will be ______ and growth of output per person will be ______.

lower; the same as it was before

Okun's law is the ______ relationship between real GDP and the ______.

negative; unemployment rate

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

negatively; positively

Schumpeter's thesis of "creative destruction" is an explanation of economic progress resulting from:

new product producers driving incumbent producers out of business.

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with floating exchange rates, lead to:

no change in income or net exports.

The IS-LM model is generally used:

only in the short run.

For the purposes of the Keynesian cross, planned expenditure consists of:

planned investment, government spending, and consumption expenditures.

The rate of growth of labor productivity (Y/L) may be expressed as the rate of growth of total factor productivity:

plus the capital share multiplied by the rate of growth of the capital-labor ratio.

"Crony capitalism" refers to situations in which banks make loans to those borrowers with the most:

political clout.

In a steady-state economy with a saving rate s, population growth n, 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 (denoting the depreciation rate by ):

sf(k)/(depreciation symbol + n + g).

The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about ______ in advance.

six to nine months

When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the:

slope of the line eventually gets flatter and flatter.

A decline in the Index of Supplier Deliveries is typically an indicator of a future _____ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future _____ in economic production.

slowdown; slowdown

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then monetary policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.

small; large.

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.

smaller; greater

The Solow model predicts that two economies will converge if the economies start with the same:

steady states.

According to the Solow model, persistently rising living standards can only be explained by:

technological progress.

Prescott interpreted fluctuations in the Solow residual as evidence that:

technology shocks are an important source of short-run economic fluctuations.

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.

If there is a fixed-exchange-rate system, then in the long run:

the nominal exchange rate is fixed, but the real exchange rate is free to vary.

An economic change that does not shift the aggregate demand curve is a change in:

the price level.

In a steady state with population growth and technological progress:

the real rental price of capital is constant and the real wage grows at the rate of technological progress.

Exhibit: Capital-Labor Ratio and the Steady State In this graph, capital-labor ratio k2 is not the steady-state capital-labor ratio because:

the saving rate is too high.

Conditional convergence occurs when economies converge to:

their own, individual steady states.

All of the following are suggested by the results of Alan Blinder's survey of firms except:

there is only one theory of price stickiness.