Quiz 1, Quiz 2, Quiz 3 questions
Suppose that the production function is given by Y = 0.5sqrtKsqrtN, where Y is output, K is capital, and N is the number of workers. Suppose that δ = 0.05. With your favorite spreadsheet software, compute steady-state output per worker and steady-state consumption per worker for s = 0; s = 0.1; s = 0.2; ..., s = 1. Graph the steady-state level of output per worker and the steady-state level of consumption per worker as a function of the saving rate. Refer to graph. At what saving rates are Y/N and C/N maximized? Y/N is maximized at a saving rate of __________.
1, and C/N is maximized at a saving rate of 0.5.
Income is a _______ variable, and financial wealth is a _______ variable. The term investment, as used by economists, refers to the ___________
flow; stock. purchase of new plants and equipment by firms and the purchase of new houses by households.
For any year t, let $Yt denote nominal GDP and Yt denote real GDP. The GDP deflator, denoted by Pt , can be expressed as
$Yt/Yt
Suppose the economy had initially been at potential output where IS crossed LM at Yn. Which of the following events could have caused the positive output gap that you indicated on the graph?
- a decrease in the tax rate - an increase in government spending
The demand for central bank money consists of the demand for If the central bank's policy is to target the interest rate associated with equilibrium point A, then any increase in the demand for central bank money requires that the central bank increases the supply of central bank money.
A and C only. -currency by people -reserves by banks
Explain why Situation A is a full medium run equilibrium and Situation B, C, D and E are not a full medium run equilibrium.
In situation A, output is at potential and unemployment is at its natural rate. In all other situations, this is not true.
Suppose the unemployment rate is very low.
It will be hard for firms to find workers to hire, and it will be easy for workers to find jobs. Thus, workers will have relatively more bargaining power than firms. As the unemployment rate gets low, the wage will increase. Thus, if the unemployment rate were ever to approach zero, the wage rate would become extremely high, discouraging further hiring
What do we know about your process of the formation of expected inflation when θ = 1?
Last year's inflation rate will be the only input for you to revise your estimates for this year's expected rate regardless of what the long-run average inflation rate is.
The sum of the quantities of final goods produced times their current prices.
Nominal GDP
The appropriate concept to use when seeking to measure production and its change over time.
Real GDP
Economists focus on this statistic when they wish to assess the performance of the economy from year to year.
Real GDP growth rate
This variable is generally considered to be a reasonably good indicator of the average standard of living.
Real GDP per person
What do we know about your process of the formation of expected inflation when θ = 0?
Regardless of what inflation was last year, you would expect it to be at the long-run average inflation rate this year.
All of the following statements accurately describe the outcome of a contractionary fiscal policy that involves a decrease in government spending except __________.
a decrease in government spending, G, always increases private investment, I.
In the IS-LM model, investment spending is specified as The figure on the right shows equilibrium in the goods market. The curve ZZ shows the demand for goods. The upward slope of curve ZZ is attributable to
a positive function of output and a negative function of the interest rate. A and B only. -consumption's positive relation to disposable income. -investment's positive dependence on sales.
Suppose the saving rate is initially greater than the golden rule saving rate. We know with certainty that an increase in the saving rate will cause:
a reduction in consumption per worker
For a given nominal interest rate, a reduction in expected inflation will cause:
a reduction in investment
In the short run, a reduction in the price of oil may lead to
a reduction in the inflation rate.
Suppose that the economy starts with a balanced budget: G = T. If the increase in G is equal to the increase in T, then the budget remains in balance. Let us now utilize the balanced budget multiplier. Suppose that G and T increase by one unit each. a. Using the government spending multiplier and the tax multiplier (which forms the balanced budget multiplier), what is the change in equilibrium GDP? b. Balanced budget changes in G and T are macroeconomically neutral. c. How does the specific value of the propensity to consume affect the size of the balanced budget multiplier?
a. 1 b. false c. The size of the propensity to consume has no impact on the balanced budget multiplier.
Rapid technological progress in China during the last three decades has largely resulted from
a. the government's strategy of encouraging joint ventures between foreign and Chinese firms. b. the incentive-induced decision of foreign firms to relocate and produce in China.
a. An increase in the number of public colleges in the United States. This should __________ the wage gap between low-skill and high-skill workers in the United States, since it tends to __________ the relative __________ high-skill workers. b. Tax credits in Central America for U.S. firms. This will __________ the wage gap between low-skill and high-skill workers in the United States, since it is likely to __________ the relative __________ U.S. low-skill workers.
a. reduce; increase; supply of b. increase; reduce; demand for
In the absence of technological progress, which of the following remains constant in the steady state equilibrium?
all of the above
c. The fiscal policy options that can prevent a decrease in the risk premium on risky bonds from increasing the level of output include d. The monetary policy options that can prevent a decrease in the risk premium on risky bonds from increasing the level of output include
c. -higher taxes -lower government expenditures d. -higher reserve requirements -open market sales
When steady state capital per worker is above the golden−rule level, we know with certainty that an increase in the saving rate will
decrease consumption in both the short run and the long run.
Suppose the money supply was initially $988 billion when the equilibrium interest rate was 28.65%. An increase in the money supply to $1,688 billion will, all else constant, cause the interest rate to
fall to the same rate indicated by the market for central bank money.
Innovations known as general-purpose technologies occur frequently
false
Mismeasurement explains a large part of the decline in technological progress
false
The change in employment and output per person in the United States since 1900 lends support to the argument that technological progress leads to a steady increase in employment.
false
Workers benefit equally from the process of creative destruction.
false
Innovations that have applications in many fields and many products are known as:
general purpose technologies.
In the absence of technological progress, we know with certainty that an increase in the saving rate will cause which of the following?
increase steady state consumption only if the increase in saving is less than the increase in depreciation.
The IS-LM diagram shows an initial equilibrium at point A. The initial IS and LM curves are 'IS1' and 'LM1'. Using the diagram on the right, show the effects on output of a decrease in government spending. When government spending decreases,
investment falls due to a reduction in output.
Policymakers can exploit the inflation-unemployment trade-off
only temporarily, because expectations adapt to higher levels of inflation.
Okun's law shows that when the unemployment rate is above the natural rate,
output is below potential.
For an equilibrium condition to occur in the goods market, ___________. When government spending increases by $100, equilibrium output in the short run is expected to ____________
output must equal consumption, investment, government spending, and net exports. increase by more than $100.
A government seeking to decrease output through the use of fiscal policy may consider
raising taxesand/or decreasing government spending.
Suppose that in addition to using her credit card, this person has two more options to pay for her purchases over the four-day period. She can go to the bank once at the beginning of each four-day period and withdraw from her account the $400 that she needs to cover her purchases for the 4-day period. Or instead of making a trip to the bank every four days, she can use the ATM. Now suppose that she withdraws $200 from the ATM every two days. Comparing the pattern of cash withdrawals, we can conclude that ATMs and credit cards have
reduced the demand for money.
Suppose the following situation exists for an economy: Kt+1/N< Kt/N. Given this information, we know that
saving per worker is less than depreciation per worker in period t.
When an economy is operating at the steady state, we know that
steady state saving is equal to depreciation per worker.
An increase in a firm's leverage ratio The high degree of securitization in the US financial system
tends to increase the expected profit per unit of capital and increase the amount of risk associated with the firm. All of the Above
In view of the above demand functions for money and bonds, one can conclude that an increase in wealth increases ____________.
the demand for bonds but has no effect on the demand for money.
In an economy in which a mix of fiscal and monetary policy is undertaken to decrease the fiscal deficit while keeping output constant, all of the following statements can accurately describe the policies and their outcomes except
the effect on investment, which depends on the interest rate and output, is uncertain.
Suppose the deposits are insured by the government. Given the decline in the value of bank capital:
the health of the bank is irrelevent to depositers and therefore there is no need to withdraw funds.
A higher saving rate implies a higher level of capital per effective worker in the steady state and _________
the rate of growth of output per effective worker remains unchanged.
Disposable income equals
the sum of consumption and saving.
In the past two decades, the real wages of low-skill U.S. workers have declined relative to the real wages of high-skill workers.
true
It is clear that the rate of technological growth has declined in the last decade.
true
New technologies do generally displace workers with lower skills.
true
The introduction of robots may actually increase total employment.
true
The natural rate of interest is not
zero
If you look mainly at what the long- run trends have been for inflation when trying to predict what inflation will be this year, then you believe that θ is near
0
When a government reduces its deficits by increasing taxes, in the short run,
IS curve shifts inward to the left.
During and following the financial crisis and recession of 2008-2010, several European countries proposed austerity measures that would help shrink the size of the national deficits within the countries. These proposed measures included tax hikes and cuts in government spending. When this happened in the United States in the 1990s, there was an accompanying decrease in the policy rate to help avoid slowing the economy down too much. Why was this same policy decision more difficult in Europe?
In response to the recession, the policy rate in Europe had already been lowered close to the zero lower bound, so additional decreases were not viable.
Suppose that the Phillips curve is given by πt=πet+0.1− 2 ut Given this equation find the natural rate of unemployment. a. The natural rate of unemployment is b. Assume that πet=(1 − θ) π + θ πt−1 and suppose that θ is initially equal to 0 and barπ = 0.030.03 and does not change. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, the authorities decide to bring the unemployment rate down to 3% and hold it there forever. c. This expectations structure is probably not realistic because it implies that
a. 5% b. In year (t + 1), the inflation rate will be 7%. In year (t + 2), the inflation rate will be 7%. In year (t + 5), the inflation rate will be 7% c. inflation expectations are always wrong.
Which of the following contributed to the transformation of the financial crisis into a major economic crisis?
a. A collapse in stock prices. Your answer is correct. b. Reduced investment spending. Your answer is correct. c. Sharply declining consumption.
The figure on the right displays a simplified consumption function. a. Which of the following expressions describes this function? b. If consumption rises by $60 when disposable income rises by $100, the value of the parameter c1 must be c. Suppose households become more optimistic about the future. All else constant, this attitude change will cause the consumption function to
a. C = c0+c1YD b. 0.6 c. shift upward.
The graph on the right shows output per worker (fKt/N), investment per worker (sfKt/N), and depreciation per worker δKt/N for an economy. Suppose the government initially has a balanced budget, then changes its policies and starts running a government budget surplus. How would this change impact the graph? Refer to the graph The new budget surplus will result in the country having higher output per worker in the long run. a. Will the government budget surplus lead to higher consumption by consumers in the long run?
a. It depends on where the country's capital is relative to the golden-rule level of capital.
Suppose that in the steady state, consumption per worker takes the following form: CN = s (1 − s)/δ, where C is consumption, s is the saving rate, and deltaδ is the depreciation rate. What would be the steady-state level of consumption per worker if s = 0.80 and deltaδ = 0.05? The steady-state level of consumption per worker is 3.20 a. Given the information above, would a policy to promote increases in private saving lead to an increase in consumption per worker in the long run?
a. No, the economy is beyond its golden-rule level of capital per worker so any increase in saving will cause lower consumption per worker in the long run.
The graph on the right shows an IS-LM graph for an economy. Point C on the graph represents the economy at potential output, Yn, with the natural rate of interest, rn. Assume that expected inflation is equal to last year's inflation. If the economy started at point C and moved to point Upper A1, the best way to describe the economy is that it is now recessionary and there is downward pressure on inflation. a. In order to move the economy from point Upper A1 to point Upper B1, what policy prescription would the central bank need to follow? b. When the economy reaches point B1, inflation will still be decreasing. If the central bank is eventually successful in returning the economy to point C, the level of inflation will be lower than it was when the economy was originally at point C.
a. The central bank must decrease the policy rate.
Suppose that a person's yearly income is $60,000. Also suppose that this person's money demand function is given by Md=$Y(0.45−i) a. Suppose that the interest rate is 10%. b. Suppose that the interest rate is 5%. c. Which of the following statements best describes the effect of income on money demand?
a. The percentage change in this person's demand for money if her yearly income falls by 25% is 25%. b. The percentage change in this person's demand for money if her yearly income falls by 25% is 25%. c. any decrease (increase) in income leads to a proportional decrease (increase) in money demand regardless of the interest rate.
a. Why is the amount of R&D spending important for growth? b. Which of the following is not a true statement? c. Suppose that an international treaty ensuring that each country's patents are legally protected all over the world is signed. How does this affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?
a. all of the above b. In a competitive market, If firms have made large profits from new products, they tend to have fewer incentives to create new discoveries c. It will raise the appropriability for firms, increase R&D spending, and raise growth for developed economies.
Calculating the risk premium on bonds The text presents a formula where (1+i) = (1−p)(1+i+x)+p(0) where i is the nominal interest rate on a riskless bond x is the risk premium p is the probability of default (bankruptcy) a. If the probability of bankruptcy is zero, the rate of interest on the risky bond is b. How would you change the formula in this case?
a. i b. The final term would become p "times" some fraction of (1+i+x).
The IS-LM view of the world with more complex financial markets Consider an economy described by the figure on the right. The units on the vertical axis of the figure are percents. If the nominal policy interest rate is 6% and the expected rate of inflation is 2%, the value for the vertical intercept of the LM curve is 4%. Suppose the nominal policy interest rate is 66%. If expected inflation increase from 2% to 3%, in order to keep the LM curve from shifting, the central bank must increase the nominal policy rate of interest to 7%. If the expected rate of inflation were to increase from 2% to 3%, the IS curve remains stationary. a. If the expected rate of inflation were to increase from 2% to 3%, the LM curve b. If the risk premium on risky bonds decreases from 6% to 5%, the LM curve If the risk premium on risky bonds decreases from 6% to 5%, the IS curve shifts rig
a. shifts down unless the central bank acts to offset. b. shifts up if the central bank acts to offset.
a. An econometric study of the dynamics of monetary policy using U.S. data covering three decades indicates that The predictive reliability of the IS-LM model appears to weaken over time because the assumption of a given price level becomes less realistic.
a. the IS-LM model accurately captures the short-run behavior of the economy in response to these policies.
