ECO 3203 exam 2
In the Solow model with technological progress, the steady-state growth rate of capital per effective worker is:
0.
The steady-state level of capital occurs when the change in the capital stock per worker (ΔΔk) equals:
0.
Assume that an economy described by the Solow model is in a steady state with output and capital growing at 3 percent and labor growing at 1 percent. The capital share is 0.3. The growth-accounting equation indicates that the contributions to growth of capital, labor, and total factor productivity are:
0.9 percent, 0.7 percent, and 1.4 percent, respectively.
Assume that the money demand function is (M / P)d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:
1,600.
According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:
100.
The total capital stock of an economy increases by 10 units and the total labor increases by 50 units. The marginal product of capital and labor are 50 and 10, respectively. If there is no TFP growth, the total output will increase by _____ units.
1000
If y = k1/2, there is no population growth or technological progress, 5 percent of capital depreciates each year, and a country saves 20 percent of output each year, then the steady-state level of capital per worker is:
16.
The recent worldwide slowdown in economic growth began in the early:
1970s
Suppose an economy has 100 units of capital, 100 units of labor, and the efficiency of each worker is equal to 2. The effective number of workers for this economy is _____ and the capital per effective worker is _____.
200; 1/2
The economic response to the overnight reduction in the French money supply by 20 percent in 1724:
confirmed that money is not neutral in the short run because both output and prices dropped.
The consumption function in the Solow model assumes that society saves a:
constant proportion of income.
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 these EXCEPT:
equal the marginal productivity of capital (MPK).
An increase in taxes lowers income:
in the short run but leaves it unchanged in the long run, while lowering consumption and increasing investment.
According to the theory of liquidity preference, decreasing the money supply will _____ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _____ nominal interest rates in the long run.
increase; decrease
Since the Covid-19 health crisis caused many businesses to temporarily shut down and lay off their workers, there was a(n) _____ in the natural rate of unemployment and the long-run aggregate supply (LRAS) curve shifted _____.
increase; left
Business cycles are:
irregular and unpredictable.
Over the business cycle, investment spending _____ consumption spending.
is more volatile than
A given increase in taxes shifts the IS curve more to the left the
larger the marginal propensity to consume.
When firms experience unplanned inventory accumulation, they typically:
lay off workers and reduce production.
Using the aggregate demand-aggregate supply (AD-AS) model, the economic downturn caused by Covid-19 can be BEST described by a:
leftward shift of LRAS and leftward shift of AD.
If the Fed accommodates an adverse supply shock, output falls _____, and prices rise _____.
less; more
If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change _____ in the short run and change _____ in the long run.
only output; only prices
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.
The balanced growth property of the Solow growth model with population growth and technological progress predicts which of these sets of variables will grow at the same rate in the steady state?
output per worker, capital per worker, real wage
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.
In the Keynesian-cross model, if the MPC equals 0.75, then a $3 billion decrease in taxes increases planned expenditures by _____ and increases the equilibrium level of income by _____.
$2.25 billion; $9 billion
If the contribution of capital to growth in output is 1.5 percent, the contribution of labor is 0.5 percent, and the Solow residual growth is equal to 1 percent, then total output must be growing at:
3 percent.
If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:
50 and the interest rate falls by 0.5 percent.
If the production function is Y = AK2/3L1/3 in the land of Antegria, and the labor force increases by 3 percent, capital stock increases by 3 percent, and TFP grows by 3 percent, then the total output growth is _____ percent.
6
Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:
70.
The efficiency of labor:
depends on the knowledge, health, and skills of labor.
In the Keynesian-cross model, actual expenditures equal:
GDP.
Which of these policies of the government is NOT designed to increase resources devoted to research and development?
Increasing the amount people can put in tax-exempt retirement accounts.
_____ cause(s) the capital stock to rise, while _____ cause(s) the capital stock to fall.
Investment; depreciation
If Y is output, K is capital, u is the fraction of the labor force in universities, L is labor, 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.
Which of these statements is NOT true about the creation of knowledge and the process of research and development?
Knowledge is a private good, that is, rival and excludable.
When capital increases by ΔΔK units, output increases by:
MPK × ΔK units.
Which one of these is a reason why many economists are skeptical about industrial policies?
Measuring externalities from different sectors is quite hard.
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 assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:
demand for real balances per unit of output.
Which of these statements is NOT true about the steady state of the basic Solow model?
The marginal product of capital always is equal to the depreciation rate.
If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:
both Central Bank A and Central Bank B should increase the quantity of money.
The IS and LM curves together generally determine:
both income and the interest rate.
The formula for steady-state consumption per worker (c*) as a function of output per worker and investment per worker is:
c* = f (k*) - 𝛿k*.
A difference between the economic long run and the short run is that:
demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.
One of the main hypotheses of the real business cycle theory is that recessions are caused by:
adverse technology shocks.
Suppose the economy is originally at a steady state where the marginal product of capital is less than the depreciation rate. If the saving rate of the economy changes to a rate consistent with the golden rule level of capital, then at the new steady state
consumption per worker will be higher compared to the original steady state.
Labor hoarding refers to:
continuing to employ workers during a recession to ensure they will be available in the recovery.
In the two-sector endogenous growth model, income growth persists because the:
creation of knowledge in universities never slows down.
Assume that a war reduces a country's labor force but does not directly affect its capital stock. If the economy was in a steady state before the war and the saving rate does not change after the war, then, over time, capital per worker will _____, and output per worker will _____ as it returns to the steady state.
decline; decrease
The version of Okun's law studied in Chapter 11 assumes that with no change in unemployment, real gross domestic product (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.
According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ΔΔT will:
decrease equilibrium income by ΔT (MPC) / (1 - MPC).
In the Solow model with population growth and no technological progress, an increase in the population growth rate leads to a(n) _____ in the effective investment rate leading to a(n) _____ in the steady-state income per worker.
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
If the government's tax revenue is less than what it spends, then the government runs a budget _____, which represents _____ public saving.
deficit; negative
If the per worker production function for an economy is given by y = k1/2, the saving rate is 0.3, the depreciation rate is 10%, and the economy starts off with 25 units of capital per worker, then the capital per worker will _____ and output per worker will _____ as the economy approaches the steady state.
fall; fall
In the Solow model, if the economy starts with more capital per worker than the steady-state level of capital per worker, then the capital per worker will _____ and the output per worker will _____ as the economy approaches steady state.
fall; fall
Suppose an economy is at its steady-state equilibrium and there is a permanent reduction in the saving rate of the economy. In this case, as the economy approaches its new steady state, capital per worker will _____ and output per worker will _____.
fall; fall
Other things equal, a given change in government spending has a larger effect on demand the:
flatter the LM curve.
Analysis of population growth around the world concludes that countries with high population growth tend to:
have a lower level of income per worker than countries with low population growth.
A study by economists on the relationship between firm management and productivity concludes that well-managed firms have all of these features EXCEPT:
higher bankruptcy rates
For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are _____, generating a _____ quantity of output demanded.
higher; greater
If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in _____ prices and _____ output in the short run.
higher; lower
Economic research shows that _____ in explaining international differences in living standards.
human capital is at least as important as physical capital
The total output of an economy grows at 4 percent and the depreciation rate is 3 percent. Further, the capital stock is 6 times one year's GDP and the capital income is 30 percent of GDP. In this case, we can conclude that the economy is operating at a level of capital _____ than the Golden Rule and _____ saving will lead to more consumption in the long run.
more; decreasing
In the Solow model with technological progress, the steady-state growth rate of total output is:
n + g.
Schumpeter's thesis of "creative destruction" is an explanation of economic progress resulting from:
new product producers driving incumbent producers out of business.
The IS-LM model is generally used:
only in the short run.
Suppose that an economy is in its steady state and the capital stock is above the Golden Rule level. Assuming that there are no population growth or technological change, if the saving rate falls:
output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state.
In the short run, a favorable supply shock causes:
prices to fall and output to rise.
A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____.
prices; output
Stabilization policy refers to policy actions aimed at:
reducing the severity of short-run economic fluctuations.
When an economy's capital is below the Golden Rule level, reaching the Golden Rule level:
requires initially reducing consumption to increase consumption in the future.
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.
When an economy begins above the Golden Rule level, reaching the Golden Rule level:
results in higher consumption at all times in the future.
The Solow model shows that a key determinant of the steady-state ratio of capital to labor is the:
saving rate.
In a steady-state economy with a saving rate s, population growth n, depreciation rate 𝛿, and labor-augmenting technological progress g, 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).
The type of legal system and the level of corruption in a country have been found to be:
significant determinants of the rate of economic growth in a country.
The LM curve, in the usual case:
slopes up to the right.
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.
If the interest rate is above the equilibrium value, the:
supply of real balances exceeds the demand.
Endogenous growth theory rejects the assumption of exogenous:
technological change.
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.
Along an IS curve all of these are always true EXCEPT:
the demand for real balances equals the supply of real balances
The rate of labor-augmenting technological progress (g) is the growth rate of:
the efficiency of labor.
Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:
the government-spending multiplier is larger than the tax multiplier.
The LM curve shows combinations of _____ that are consistent with equilibrium in the market for real money balances.
the interest rate and the level of income
The IS curve shifts when any of the following economic variables change EXCEPT:
the interest rate.
In the Solow growth model, the assumption of constant returns to scale means that:
the number of workers in an economy does not affect the relationship between output per worker and capital per worker.
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.
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.
Conditional convergence occurs when economies converge to:
their own individual steady states.
According to the Kremerian model, large populations improve living standards because:
there are more people who can make discoveries and contribute to innovation.
Countries that save and invest more in physical capital will appear to be more efficient if:
there are positive externalities to physical capital accumulation.
Which of these statements is NOT true about the steady state in the Solow Model with population and technological progress:
total capital stock and total output grow at the rate of population growth.
A decrease in the nominal money supply, other things being equal, will shift the LM curve:
upward and to the left.
Balanced growth refers to the property where:
values of many variables within a country rise together in the steady state.
Measures of average workweeks and building permits for new housing units are included in the index of leading indicators, because shorter workweeks tend to indicate _____ future economic activity and increased permits for new units tend to indicate _____ future economic activity.
weaker; stronger
If the production function is y = k1/2, the steady-state value of y in the Solow model with population growth and technological progress is:
y = s / (𝛿 + n + g).
