ECON 302 - Exam 2 Study Questions

Suppose a bicycle costs $300 in the United States and 150 pounds in Great Britain. What would the nominal exchange rate in pounds per dollar have to be for purchasing-power parity to hold? 0.5 1 2 2.5

0.5 1 2 2.5 A

Assume the nominal exchange rate is 0.75 euros per dollar. Suppose that a Volkswagen Golf costs 10,000 euros in Germany, while it costs $12,000 in the United States. What is the real exchange rate? 0.75 1.2 0.9 1.1

0.75 1.2 0.9 1.1 C

Suppose output per worker is 10, the production function is y = k^(0.5) and the total capital stock is 1,000. How large is the labor force? 1 10 100 1,000

1 10 100 1,000 B

If the nominal exchange rate is $1 equals 150 Japanese yen, and a Big Mac costs $2 in the U.S. and 300 yen in Japan, then the real exchange rate of U.S. Big Macs for Japanese Big Macs is: 1 2 150 300

1 2 150 300 A

Suppose the production function is y = k^(0.5), s = 0.40, and the depreciation rate is 0.10. What level of saving will lead to the highest possible level of output in the steady state? 25 percent 50 percent 75 percent 100 percent

25 percent 50 percent 75 percent 100 percent D

Consider the following data on the Transalpinian economy: Y=1,000; C=700; G=150; I=250 - 10r*. The world interest rate is 5. What are net exports of Transalpinia? 50 (50) 150 (150)

50 (50) 150 (150) B

If the number of employed workers equals 200 million and the number of unemployed workers equals 20 million, the unemployment rate equals ______ percent (rounded to the nearest percent). a)20 b)9 c)10 d)0

a)20 b)9 c)10 d)0 B

The change in the capital stock is equal to: investment. investment - depreciation. investment + inflation. investment - depreciation - inflation.

investment. investment - depreciation. investment + inflation. investment - depreciation - inflation. B

When a nation runs a trade deficit,

it experiences a capital inflow

If two economies are identical except for their rates of population growth, then if both economies are in steady state, the economy with the higher rate of population growth will have a: lower rate of growth of total output. higher rate of growth of total output. lower rate of growth of output per person. higher rate of growth of output per person.

lower rate of growth of total output. higher rate of growth of total output. lower rate of growth of output per person. higher rate of growth of output per person. B

At the Golden Rule level of capital accumulation, the marginal product of capital equals the: real interest rate. depreciation rate. savings rate. marginal product of labor.

real interest rate. depreciation rate. savings rate. marginal product of labor. B

The sum of all domestic spending on foreign goods is called: consumption. imports. exports. net exports.

consumption. imports. exports. net exports. B

Suppose an economy is in steady state and has more capital than it would have in the Golden Rule steady state. A policymaker would want to pursue policies aimed at decreasing: consumption. the rate of saving. the depreciation rate. the rate of population growth.

consumption. the rate of saving. the depreciation rate. the rate of population growth. B

Consider the following data on the Transalpinian economy: Y=1,000; C=650; G=200; I=250 - 20r*. The world interest rate is 7.5 percentage points. How must the world interest rate change to make net exports zero? It must rise by 5 percentage points. It must rise by 2.5 percentage points. It must remain constant. It must fall by 2.5 percentage points

It must rise by 5 percentage points. It must rise by 2.5 percentage points. It must remain constant. It must fall by 2.5 percentage points D

Suppose the production function is y = k^(0.5), s = 0.40, and the depreciation rate is 0.10. What is the steady-state level of capital? 2 4 10 16

2 4 10 16 D

Suppose the capital stock is 100, the depreciation rate is 10 percent per year, and annual output is 25. What must the annual saving rate be to keep the capital stock constant? 2.5 percent 10 percent 25 percent 40 percent

2.5 percent 10 percent 25 percent 40 percent D

Suppose that the marginal product of capital is 0.5k^(-0.5), s = 0.20, the population growth rate is 0.02, and the depreciation rate is 0.08. What is the Golden Rule level of capital per capita? 20 25 30 35

20 25 30 35 B

Other things equal, an increase in government purchases of goods and services pushes the trade balance toward _________ and causes the currency to ____________

Deficit Appreciate

A rise in the price level would cause the currency to

Depreciate

If net exports are positive, which of the following is FALSE? Domestic output exceeds domestic spending. Domestic saving exceeds domestic investment. Net capital outflow is positive. There is a trade deficit.

Domestic output exceeds domestic spending. Domestic saving exceeds domestic investment. Net capital outflow is positive. There is a trade deficit. D

A war has wrecked the economy of Baloneya: both the capital stock and the work force have been reduced by 50 percent. If the economy's production function is the same constant-returns-to-scale function as before, and the saving and depreciation rates are the same as well, how will the postwar level of steady-state output per worker compare to the prewar level? It will be lower. It will be higher. It will be the same. It could be higher or lower.

It will be lower. It will be higher. It will be the same. It could be higher or lower. C

An economy is in a steady state with capital higher than the Golden Rule level. Now the saving rate falls to a level that will achieve the Golden Rule capital stock in the long run. What will happen to the level of consumption between the initial and new steady states? It will rise gradually to its new steady-state level. It will fall instantly and then will rise gradually to its new steady-state level. It will rise instantly and then will fall gradually to its new steady-state level. It will rise instantly and then will remain constant.

It will rise gradually to its new steady-state level. It will fall instantly and then will rise gradually to its new steady-state level. It will rise instantly and then will fall gradually to its new steady-state level. It will rise instantly and then will remain constant. C

In the small open economy model, if a country begins in a position of balanced trade, what happens when the government increases taxes? Net capital outflow becomes negative. The interest rate rises. Net exports decrease. The balance of trade goes into surplus.

Net capital outflow becomes negative. The interest rate rises. Net exports decrease. The balance of trade goes into surplus. D

If net capital outflow is positive, then: S - I is negative. private savings exceeds private investment. NX is positive. public saving exceeds public investment.

S - I is negative. private savings exceeds private investment. NX is positive. public saving exceeds public investment. C

Natural rate of unemployment

The average rate of unemployment around which the economy fluctuates

If a Canadian investor buys one million dollars worth of stock in an American company, how does this transaction appear in the national income accounts of the United States? The balance of trade rises as we export $1 million of stock. The balance of trade falls as we import Canadian investment. Net capital outflow rises by $1 million. Net capital outflow falls by $1 million.

The balance of trade rises as we export $1 million of stock. The balance of trade falls as we import Canadian investment. Net capital outflow rises by $1 million. Net capital outflow falls by $1 million. D

Net capital outflow

The difference between domestic saving and domestic investment, S-I

The Golden Rule level of consumption

The level of capital that maximizes steady-state consumption

The net capital outflow always equals

The trade balance S-I = NX

The price of one currency in terms of another currency, such as 100 yen for $1, is an example of: a nominal exchange rate. a real exchange rate. purchasing-power parity. a constant world interest rate.

a nominal exchange rate. a real exchange rate. purchasing-power parity. a constant world interest rate. A

Suppose that over the course of a year 100 people are unemployed for 4 weeks each (the short-term unemployed), while 10 people are unemployed for 52 weeks each (the long-term unemployed). Approximately what percentage of the total weeks of unemployment were attributable to the long-term unemployed? a) 9 percent. b) 56.5 percent. c) 43.5 percent. d) 10 percent.

a) 9 percent. b) 56.5 percent. c) 43.5 percent. d) 10 percent. B

If the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.01 and the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is: a) about 11 percent. b) 1 percent. c) 9 percent. d) 10 percent.

a) about 11 percent. b) 1 percent. c) 9 percent. d) 10 percent. D

When Henry Ford paid his workers $5 per day when the prevailing wage was between $2 and $3 a day: a) it greatly increased his company's costs. b) it raised the efficiency of his workers. c) workers reduced their work efforts because they felt they "had it made." d) Ford proved the efficiency-wage theory was wrong.

a) it greatly increased his company's costs. b) it raised the efficiency of his workers. c) workers reduced their work efforts because they felt they "had it made." d) Ford proved the efficiency-wage theory was wrong. B

Government policies directed at reducing frictional unemployment include: a) making unemployment insurance 100 percent experience rated. b) abolishing minimum-wage laws. c) making government part of the union-firm wage bargaining process. d) increasing the earned income credit.

a) making unemployment insurance 100 percent experience rated. b) abolishing minimum-wage laws. c) making government part of the union-firm wage bargaining process. d) increasing the earned income credit. A

Frictional unemployment is unemployment caused by: a) minimum-wage legislation. b) wage rigidity. c) clashes between the motives of insiders and outsiders. d) the time it takes workers to search for a job.

a) minimum-wage legislation. b) wage rigidity. c) clashes between the motives of insiders and outsiders. d) the time it takes workers to search for a job. D

When insiders have a much greater impact on the wage-bargaining process than do outsiders, the negotiated wage is likely to be ______ the equilibrium wage. a) much less than b) about one-half of c) almost equal to d) much greater than

a) much less than b) about one-half of c) almost equal to d) much greater than D

In a steady state: a) no hiring or firings are occurring. b) the number of people finding jobs exceeds the number of people losing jobs. c) the number of people finding jobs equals the number of people losing jobs. d) the number of people losing jobs exceeds the number of people finding jobs.

a) no hiring or firings are occurring. b) the number of people finding jobs exceeds the number of people losing jobs. c) the number of people finding jobs equals the number of people losing jobs. d) the number of people losing jobs exceeds the number of people finding jobs. C

Economists call the changes in the composition of demand among industries and regions: a) sectoral shifts. b) moral hazard. c) adverse selection. d) insider-outsider conflicts.

a) sectoral shifts. b) moral hazard. c) adverse selection. d) insider-outsider conflicts. A

Workers unemployed as a result of wage rigidity are: a) waiting for a job to become available. b) not eligible to receive unemployment insurance benefits. c) relocating to another part of the country as a result of sectoral shifts. d) actively searching for a job to match their skills.

a) waiting for a job to become available. b) not eligible to receive unemployment insurance benefits. c) relocating to another part of the country as a result of sectoral shifts. d) actively searching for a job to match their skills. A

Which of the following causes a fall in the real exchange rate? an exogenous increase in foreign demand for domestic goods an exogenous decrease in investment an increase in government purchases a decrease in taxes

an exogenous increase in foreign demand for domestic goods an exogenous decrease in investment an increase in government purchases a decrease in taxes B

Suppose that Japan is the home country. If the Japanese inflation rate is 5 percent while the U.S. inflation rate is 10 percent, then Japanese yen will: appreciate by 15 percent against the U.S. dollar. depreciate by 15 percent against the U.S. dollar. depreciate by 5 percent against the U.S. dollar. appreciate by 5 percent against the U.S. dollar.

appreciate by 15 percent against the U.S. dollar. depreciate by 15 percent against the U.S. dollar. depreciate by 5 percent against the U.S. dollar. appreciate by 5 percent against the U.S. dollar. D

The law of one price applied to the international marketplace is called: arbitrage. nominal exchange rates. real exchange rates. purchasing-power parity.

arbitrage. nominal exchange rates. real exchange rates. purchasing-power parity. D

The Solow growth model assumes the production function exhibits: decreasing returns to scale. constant returns to scale. increasing returns to scale. increasing marginal product.

decreasing returns to scale. constant returns to scale. increasing returns to scale. increasing marginal product. B

In a small open economy, the interest rate is determined by the: equilibrium of saving and investment. interest rate in the rest of the world. excess of government spending over government revenue. value of net capital outflow.

equilibrium of saving and investment. interest rate in the rest of the world. excess of government spending over government revenue. value of net capital outflow. B

Choose the pair of words that best complete this sentence: If government purchases increase, national saving will ________ and the equilibrium real exchange rate will _______. fall; fall fall; rise rise; rise rise; fall

fall; fall fall; rise rise; rise rise; fall B

In the Solow model, the depreciation rate represents the: fraction of income taken by taxes. difference between the nominal and real interest rates. inflation rate. fraction of the capital stock that wears out each year.

fraction of income taken by taxes. difference between the nominal and real interest rates. inflation rate. fraction of the capital stock that wears out each year. D

Which of the following characterizes the U.S. economy since 2001? government budget deficit and negative net capital outflow government budget deficit and positive net capital outflow government budget surplus and negative net capital outflow government budget surplus and positive net capital outflow

government budget deficit and negative net capital outflow government budget deficit and positive net capital outflow government budget surplus and negative net capital outflow government budget surplus and positive net capital outflow A

If two economies are identical except for their rates of population growth, then the economy with the higher rate of population growth will have: higher steady-state output per worker. higher steady-state capital per worker. higher steady-state consumption per worker. lower steady-state output per worker.

higher steady-state output per worker. higher steady-state capital per worker. higher steady-state consumption per worker. lower steady-state output per worker. D

The Golden Rule level of capital accumulation is defined as the level of the capital stock that achieves a steady state with the: highest rate of savings. highest level of income. highest level of consumption. lowest level of depreciation.

highest rate of savings. highest level of income. highest level of consumption. lowest level of depreciation. C

In the small open economy model, if a country begins from a position of balanced trade, an increase in the world interest rate from a fiscal expansion abroad leads to which of the following? negative net capital outflow and a trade surplus positive net capital outflow and a trade surplus positive net capital outflow and a trade deficit negative net capital outflow and a trade deficit

negative net capital outflow and a trade surplus positive net capital outflow and a trade surplus positive net capital outflow and a trade deficit negative net capital outflow and a trade deficit B

If a country's real exchange rate falls (depreciates), then: net exports rise. net exports fall. exports and imports rise by the same amount. exports and imports fall by the same amount.

net exports rise. net exports fall. exports and imports rise by the same amount. exports and imports fall by the same amount. A

Trade balance

the value of a nation's exports minus the value of its imports; also called net exports