Econ final
Which of the following will cause an increase in output per worker in the long run?
A. an increase in the stock of human capital. B. a reduction in the depreciation rate. C. an increase in the saving rate. D. all of the above. ALL OF ABOVE
The natural rate of unemployment is the rate of unemployment
A. that occurs when both the goods and financial markets are in equilibrium. B. that occurs when the money market is in equilibrium. C. where the markup of prices over costs is equal to its historical value. D. that occurs when the markup of prices over costs is zero. E. none of the abov NONE OF ABOVE
This problem asks you to work out in more detail the example of reverse causation described in the text. Suppose that firms that expect to increase production in the future have to increase their current transactions (for example, they may need to purchase more raw materials). For this reason, current real money demand rises when expected future output rises. a. Under the assumption that real money demand depends on expected future output, use the classical IS-LM model to find the effects of an increase in expected future output on the current price level. For simplicity, assume that any effects of the increase in expected future output on the labor market or on desired saving and investment are small and can be ignored. b. Suppose that the Fed wants to stabilize the current price level. How will the Fed respond to the increase in expected future output?
higher future output increases money demand, so the price level declines in equilibrium The Fed will increase the money supply in response to the increase in money demand, which shows reverse causation.
Which of the following is NOT a reasonable explanation for the Great Moderation?
higher oil prices
Which of the following best completes the definition of money as used by economists? Money is:
a special set of assets that are widely accepted as payments for goods and services.
The main components that any theory of the business cycle must contain or describe are In the real business cycle theory, the primary source of cyclical fluctuations is The model of the macroeconomy that is used in the real business cycle theory is
a specification of the types of shocks affecting the economy and a model of the macroeconomy that explains how the economy responds to such shocks. productivity shocks. the classical IS-LM model that assumes that prices adjust quickly to restore equilibrium.
During the period 1973-1975, the United States experienced a deep recession with a simultaneous sharp rise in the price level. Would you conclude that the recession was the result of a supply shock or a demand shock?
a supply shock, because if it was a demand shock, the price level would have declined
A country loses much of its capital stock to a war. What effects should this event have on the country's current employment, output, and real wage? This event should cause the country's current employment to decrease (↓), output to decrease (↓), and the real wage to decrease (↓). The loss of capital will cause desired investment to increase (↑). Assume that the desired saving function doesn't change. The loss of capital will cause the country's real interest rate and the quantity of investment to increase (↑).
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Money is said to be neutral if: After prices adjust, money is neutral in the IS-LM model because: Regarding neutrality of money:
if a change in the money supply changes the price level and other nominal variables but has no effect on real variables. any change in money supply that shifts the LM curve is finally matched by a proportional change in the price level that shifts the LM curve to its original position. classical economists believe that money is neutral in both the short run and the long run, but Keynesians believe that money is neutral only in the long run but not in the short run due to sluggish adjustment of the price level in the short run.
Suppose the Japanese firm, Toyota, builds a new plant to produce cars in Ohio. This is Toyota's investment in the new plant causes
foreign direct investment in the United States. an increase in the financial account balance in the United States.
The main difference between the classical IS-LM model and the Keynesian IS-LM model is that The distinction between the classical IS-LM model and the Keynesian IS-LM model is important because the classicals are less likely than/as Keynesians to recommend government intervention to restore equilibrium.
in the classical model, prices are assumed to adjust quickly to restore equilibrium, while in the Keynesian model, prices are slow to adjust to restore equilibrium.
The misperceptions theory concludes that:
in the short run, anticipated monetary changes are neutral but unanticipated monetary changes are not neutral.
In each of the following cases, what is the effect on the AD curve? An increase in the effective tax rate on capital An increase in the money supply An increase in the price level
shifts the AD curve down and to the left. shifts the AD curve up and to the right. does not shift the AD curve.
In each of the following cases, what is the effect on the IS curve? An increase in the effective tax rate on capital An increase in the money supply A temporary increase in goverment spending
shifts the IS curve down and to the left. does not change the IS curve. shifts the IS curve up and to the right.
In each of the following cases, what is the effect on the LM curve? An increase in the expected inflation rate An increase in government spending An increase in the price level
shifts the LM curve down and to the right. does not shift the LM curve. shifts the LM curve up and to the left.
Since U.S. investment is generally higher than U.S. national saving:
the U.S. current account balance is generally negative.
What is the marginal product of labor (MPN)? How is the MPN curve related to labor demand?
the additional amount of output produced when one unit of labor is added. The MPN curve is identical to the labor demand curve.
How is full-employment output determined in the Keynesian model with efficiency wages? In this model, how is full-employment output affected by changes in productivity (supply shocks)? How is full-employment output affected by changes in labor supply?
the amount of output produced by firms with employment determined by the labor demand curve at the point where the marginal product of labor equals the efficiency wage A productivity shock affects the marginal product of labor, so employment changes Labor supply changes have no effect on the efficiency wage or employment; so they have no impact on full-employment output.
The LM curve shows All of the following can shift the LM curve down and to the right except
the combinations of the real interest rate and output such that the asset market is in equilibrium. a reduction in money supply.
Menu costs are, by definition
the costs of changing prices.
Which of the following would represent a cost during a period of disinflation?
Decline in output
How do changes in the expected inflation rate account for the behavior of the Phillips curve in the 1960s, 1970s, and 1980s in the United States? What role do supply shocks play in explaining the behavior of the short-run Phillips curve in the United States?
Expected inflation was low and stable in the 1960s; expected inflation rose significantly in the 1970s because of supply shocks and expansionary policy, shifting the short-run Phillips curve up; and expected inflation fell to low levels in the 1980s because of contractionary monetary policy, shifting the short-run Phillips curve down. The instability of the short-run Phillips curve is largely because of higher expected inflation associated with supply shocks in the 1970s.
What effects does expansionary monetary policy have on the nominal exchange rate in both the short and long run?
In both the short run and the long run, the nominal exchange rate depreciates.
What does the Keynesian model predict about monetary neutrality?
In the short run, changes in the money supply will affect output and the real interest rate while in the long run, these changes will only affect the price level
Which of these statements best characterizes the movement of the U.S. federal government debt-GDP ratio since 1939? Which two factors would both cause the debt-GDP ratio to rise quickly?
The debt-GDP ratio rose sharply in World War II, declined from 1946 to the early 1970s, rose in the 1980s and early 1990s, declined from the mid-1990s to 2000, and has been rising since then. a high deficit relative to GDP and a slow rate of GDP growth
How could changes in the labor market lead to lower overall economic volatility?
Less volatility in employment demand reduces the probability of a worker losing his or her job.
Use the IS-LM model to determine the effects of an influx of working - age immigrants that increases labor supply. Show the effects below on the general equilibrium values of real wage, employment, output, real interest rate, consumption, investment, and price level.
Real wage Decreases Employment Increases Output Increases Price Level Decreases Real Interest Rate Decreases Investment Increases Consumption Increases
In the Keynesian model, how does a temporary increase in government purchases affect the following? Your answers in each column should be relative to the original long-run equilibrium levels of each variable. How is a temporary increase in government purchases likely to affect the composition of output in the long-run?
SR output: increase LR output: unchanged SR RIR: increase LR RIR: increase Consumption Expenditure: Decrease Investment Expenditure: Decrease
What does the Keynesian model predict about the cyclical behavior of average labor productivity? How does the idea of labor hoarding help bring the prediction of the model into conformity with the business cycle facts?
The Keynesian theory assumes that demand shocks cause most cyclical fluctuations. This means that during expansions when employment rises, average labor productivity declines, so it is countercyclical. The business cycle fact is that average labor productivity is mildly procyclical. If labor hoarding occurs, so that a given measured amount of employment produces less output during recessions and more output during expansions, then measured average labor productivity would be procyclical.
Who determines monetary policy in the United States? How is the Board of Governors of the Federal Reserve system appointed?
The Federal Reserve System All members of the Board of Governors, including the Chairman, are appointed by the President.
What is the J curve?
The J curve shows the response of net exports to a real depreciation, in which at first net exports decline, but later they rise.
According to the classical model, after an economic disturbance, which of the following is true? According to the Keynesian model, after an economic disturbance, which of the following is true?
The economy will rapidly return to general equilibrium as prices adjust quickly. Price adjustment will eventually return the economy to general equilibrium, but this may take several years.
Consider an economy with a constant growth rate of nominal money supply and a constant real interest rate r = 0.07. Which of the following statements about the inflation rate of the economy would be valid?
The faster the economy's real output grows, the lower the inflation rate.
Whenever the expected inflation rate is positive:
A. the real interest rate is greater than the nominal interest rate. B. the real interest rate is negative. C. the real interest rate is positive. D. the nominal interest rate must be equal to the real interest rate. E. none of the above ITS NONE OF ABOVE
d. In general, how does the relationship between the actual deficit and the full-employment deficit depend on the state of the economy?
The full-employment deficit is unaffected by the state of the economy, while the actual deficit rises relative to the full-employment deficit in recessions and falls relative to the full-employment deficit in expansions.
How is government debt related to the government deficit? What of the following factors would contribute to a large increase in the debt-GDP ratio?
The government deficit is the change in the government debt. a high deficit relative to GDP
Which is NOT a correct statement about the national income accounts?
The income approach to measuring economic activity provides a figure that is equal to the sum of revenues by the producers of output, which in turn is equivalent to that of the product approach.
Which of the following does not represent a potential explanation of the changing natural unemployment rate in the United States?
The increased value of the dollar in the 1990s
Define inflation tax (also called seignorage). How does the government collect the inflation tax, and who pays it?
The inflation tax arises when the government raises revenue by printing money. The government collects the inflation tax by printing money to purchase goods and services; the tax is paid by anyone who holds money.
What is the effect on the monetary base when the Federal Reserve purchases U.S. Treasury securities in the open market? What is the effect on the money supply?
The monetary base increases. The money supply increases.
What is the impact on the money supply when the Federal Reserve increases reserve requirements? What is the impact on the money supply when banks reduce the amount of borrowing from the discount window? What is the impact on the money supply when the Federal Reserve decreases the discount rate? What is the impact on the money supply when the Federal Reserve increases the interest rate it pays on reserves?
The money supply decreases. The money supply decreases. The money supply increases. The money supply decreases.
Define money multiplier. If the public elects to increase their holdings of currency, what happens to the money multiplier, all else equal? If banks choose to hold more reserves, what happens to the money multiplier, all else equal? Does the fact that the public and banks can affect the money multiplier imply that the central bank cannot control the money supply?
The number of dollars that can be created from each dollar of monetary base. It decreases It decreases no
How is the price level related to nominal money demand? How is the level of real income related to money demand? How is the interest rate on other assets (stocks and bonds for example) related to money demand?
They are directly related-the higher the price level, the higher the demand for money. They are directly related They are inversely related
According to Friedman and Phelps the expectations-augmented Phillips curve differs from the original Phillips curve in that the expectations-augmented Phillips curve predicts a negative relationship between:
Unanticipated inflation and cyclical unemployment.
Why do economists suggest that tax rates be kept roughly constant over time, rather than alternating between high and low levels?
Varying between a high and low tax rate leads to a greater average distortion than keeping the tax rate constant at a medium level.
Which of the following represents a cost of unanticipated inflation?
Wealth transfer.
In the efficiency-wage model, a decrease in productivity would cause the real wage to In the efficiency-wage model, a decrease in productivity would cause output to
be unchanged. fall
Which of these represents an example in which there is a difference between the average tax rate and the marginal tax rate on a person's income. For a constant before-tax real wage, which type of tax rate most directly affects how wealthy a person feels? average tax rate Which type of tax rate affects the reward for working an extra hour? marginal tax rate
no tax on income below $15,000, then a tax at 20% on income above $15,000, for a person with an income of $30,000.
Which of the following best defines the real interest rate (r)?
the amount of goods we must give up next year in order to consume more goods today.
Define purchasing power parity, or PPP.
the idea that similar foreign and domestic goods, or baskets of goods, should have the same price when priced in terms of the same currency.
According to the Keynesian analysis, in what two ways does an adverse supply shock reduce output? What problems do supply shocks create for Keynesian stabilization policies?
the supply shock reduces the marginal product of labor and shifts the LM curve up and to the left policy can do nothing to affect the location of the FE line; and using expansionary policy risks worsening the already-high rate of inflation
Price stickiness is:
the tendency of prices to adjust slowly to changes in the economy
Why do foreigners demand dollars in the foreign exchange market? Why do U.S. residents supply dollars to the foreign exchange market?
to be able to buy U.S. goods, services, and assets. to be able to buy foreign goods, services, and assets.
Why does the Federal Reserve work hard to establish its credibility? What benefits might the public gain if the Federal Reserve has a great deal of credibility?
to reduce the costs of disinflation the expected inflation rate will be low and the sacrifice ratio will be low
In the event of a recession, a Keynesian economist is likely to recommend _____ the money supply or temporarily _____ government spending. In the event of a recession, a Keynesian economist might recommend _____ taxes because Ricardian equivalence _____.
increasing; increasing cutting; does not hold
Why is a country limited in changing its money supply under a fixed-exchange-rate system? Explain how policy coordination among countries in a fixed-exchange-rate system can increase the degree to which monetary policy may be used to pursue macroeconomic goals.
because only one level of the money supply is consistent with the official exchange rate being equal to its fundamental value If countries use expansionary monetary policy at the same time, then the currencies won't become overvalued or undervalued relative to each other.
An automatic stabilizer is a provision in the budget that causes For proponents of antirecessionary fiscal policies, what advantage do automatic stabilizers have over other types of taxing and spending policies? The advantage of automatic stabilizers over legislated changes in spending and taxes is that they _____, while legislation _____.
government spending to rise or taxes to fall automatically when GDP falls. occur quickly; takes a long time to put in place
If a country employs many foreign workers, GDP is likely to be
higher than
A sensible question to ask is
how does a change in an exogenous variable affect an endogenous variable?
The costs of reducing the inflation rate depend on The speed with which inflation expectations adjust depends on
how quickly inflation expectations adjust. the credibility of the central bank.
Why do many governments have policies against negotiating with hostage-taking terrorists? In the above game, a credible commitment by the government changes the behavior of terrorists. With that in mind, how is a policy against negotiating with terrorists analogous to monetary policy?
if they negotiate with some terrorists, more terrorists will take hostages in the future If the monetary authority credibly commits to a rule, then the public will not change inflation expectations in anticipation of an increase in the money supply.
Improved technology is likely to
increase the marginal product of labor.
According to the misperceptions theory, what effect does an increase in the price level have on the amount of output supplied by producers? Does it matter whether the increase in the price level was expected, for an increase in the price level to increase output?
it fools producers of goods into producing more the change in prices must be unexpected
The implementation lag means that Fiscal policy may not be effective because of the time it takes for a policy change to affect the economy, which is known as the The recognition lag means that Fiscal policy may not be effective because of the time it takes for policymakers to enact a change in policy, which is known as the
it takes time for policymakers to put a new policy into place. Fiscal policy may not be effective because of the time it takes for a policy change to affect the economy, which is known as the it takes time for policymakers to realize that a policy change is needed. legislative lag.
When workers' skills do not match the skills needed for available jobs, there is said to be Job mismatch causes
job mismatch. structural unemployment.
Compared with most other OECD countries, how high is the ratio of U.S. government spending to GDP?
lower than most other OECD countries
Suppose that the Fed has a policy of increasing the money supply when it observes that the economy is in recession. However, suppose that about six months are needed for an increase in the money supply to affect aggregate demand, which is about the same amount of time needed for firms to review and reset their prices. What effects will the Fed?s policy have on output and price stability? Does your answer change if (a) the Fed has some ability to forecast recessions or (b) price adjustment takes longer than six months?
A lag in the impact of policy of six months, which is about the time it takes firms to adjust prices, could cause policy to be destabilizing If the Fed could forecast recessions well, or if the Fed's policy takes effect before firms adjust prices, it could stabilize the economy by using monetary policy appropriately before a recession begins.
Because adverse supply shocks raise both expected inflation and the natural unemployment rate, the short-run Phillips curve shifts up and to the right. Which of the following does NOT describe the effectiveness of macroeconomic policy by classical and Keynesian economists?
According to the Lucas critique, Keynesian activist policies could not have exploited a stable Phillips curve even in the short run.
For a given real exchange rate, how are a country's net exports affected by an increase in domestic income? For a given real exchange rate, how are a country's net exports affected by an increase in foreign income? How does an increase in the domestic real interest rate affect the real exchange rate and net exports?
An increase in domestic income leads people to buy more goods, including imported goods, so net exports decline. An increase in foreign income leads foreigners to buy more goods, including exported goods, so net exports increase. The real exchange rate rises and net exports decline.
What are the two main types of exchange-rate systems? Currently, which type of system determines the values of the major currencies, such as the dollar, yen, and euro?
A fixed-exchange-rate system and a flexible-exchange-rate system. flexible-exchange-rate system
Suppose the government levies a lump-sum tax on workers. Which of the following best explains the effect on the supply of labor?
A lump-sum tax has only an income effect, so increasing the tax will cause the supply of labor to increase.
"It is plain to see that discretion is a better way to run monetary policy than following a rule because a policy of discretion gives the central bank the ability to react to news about the economy." Which of the following best represents the monetarist response to this statement? Which of the following best represents a response utilizing more recent arguments?
Because of information lags, it is difficult for the central bank to tell what the appropriate policy is at a particular time. Credibility can be enhanced by using a rule. If people believe the bank is committed to a rule, they will believe that the central bank will not take advantage of them by using unexpected inflation to temporarily increase output, so inflation is lower.
Can policymakers exploit the Phillips curve relationship by trading more inflation for less unemployment in the short run? In the long run? Explain both the classical and Keynesian points of view.
Classicals say the tradeoff exists in neither the short run nor the long run; Keynesians say there is a tradeoff in the short run but not in the long run.
How would each of the following likely affect the natural rate of unemployment. a. A new law prohibits people from seeking employment before age eighteen. b. A new Internet service, Findwork.com, makes it easy for people to check on the availability of jobs around the country. c. The length of time that unemployed workers can receive government benefits increases from six months to one year. d. A shift in the public's buying habits greatly expands the demand for sophisticated consumer electronics while reducing the demand for traditional consumer goods and services, such as clothing and restaurant meals. e. Tight monetary policy, introduced to get the inflation rate down, drives the economy into a recession.
Decrease in the natural rate of unemployment. Decrease in the natural rate ofunemployment. Increase in the natural rate of unemployment. Increase in the natural rate of unemployment. No effect on the natural rate ofunemployment.
Define the velocity of money.
Define the velocity of money. stable
Which of the following government policies will not reduce the natural rate of unemployment?
Increase unemployment insurance payments.
In what ways would you expect inflation-targeting countries to do better than non-inflation-targeting countries?
Inflation is expected to be more stable in countries that use inflation targeting, without an increase in the volatility of output.
What are the major characteristics of an inflation targeting regime?
Inflation targeting is a system in which a central bank decides on a specific numerical target for inflation and a plan for achieving it.
How does the IS-LM model for an open economy differ from the IS-LM model for a closed economy? Describe how a recession in one country may be transmitted to other countries.
International influences may shift the IS curve. A recession in one country reduces the net exports of other countries, shifting their IS curves down and to the left.
Various explanations have been suggested for real-wage rigidity in the Keynesian model. Which is NOT one of them?
Labor hoarding
According to the Keynesian IS−LM model, what is the effect of the following on output, the real interest rate, employment, and the price level of an economy? Distinguish between effects in the short-run and in the long-run. Your answers in each column should be relative to the original long-run equilibrium levels of each variable. Increased tax incentives for investment (the tax breaks for investment are offset by lump−sum tax increases that keep total current tax collections unchanged right parenthesis .
Output: Increase Remains unchanged Real Interest Rate: Increase Increase Employment: Increase Remains unchanged Price Level: Remains unchanged Increase
According to the Keynesian IS−LM model, what is the effect of the following on output, the real interest rate, employment, and the price level of an economy? Distinguish between effects in the short-run and in the long-run. Your answers in each column should be relative to the original long-run equilibrium levels of each variable. Increased tax incentives for saving (the tax breaks for investment are offset by lump−sum tax increases that keep total current tax collections unchanged right parenthesis .
Output: Decrease Remains unchanged Real Interest Rate:Decrease Decrease Employment: Decrease Remains unchanged Price Level: Remains unchanged Decrease
Which of the following best represents the relationship between inflation and the unemployment rate?
The Phillips curve
Why is some state and local spending paid for by grants in aid from the Federal government instead of entirely through taxes levied by states and localities on residents? What are the advantages and disadvantages of a system of grants in aid?
The benefits to education, transportation, and welfare programs accrue to the entire nation, but these programs are most efficiently administered at the state and local level. Advantage: the national government can identify the features that make these programs have nationwide benefits; disadvantage: the administration of the programs may become politicized.
Explain the difference between the overall government budget deficit and the primary deficit. Explain the difference between the primary deficit and the primary current deficit. Why are three deficit concepts needed?
The overall budget deficit equals the primary budget deficit plus net interest payments. The primary current budget deficit equals the primary budget deficit minus government investment. The overall deficit tells how much the government must borrow currently to pay for its outlays; the primary deficit tells whether current revenues are sufficient to pay for current programs; the primary current deficit tells whether current revenues are sufficient to pay for current programs other than government investment.
Both transfer programs and taxes affect incentives. Consider a program designed to help the poor that promises each aid recipient a minimum income of $10,000. That is, if the recipient earns less than $10,000, the program supplements his income by enough to bring him up to $10,000. Explain why this program would adversely affect incentives for low-wage recipients. Consider a program with a better incentive effect would be to provide a subsidy to labor income. The program subsidizes labor income at a 25% rate. If a person worked 2000 hours per year at a wage of $4 per hour, to get labor income of $8000, the subsidy would increase the person's wage by 25% to $5 per hour, so he or she would earn $10,000 per year.
The program has very bad incentive effects, because the marginal tax rate for any income earned below $10,000 is 100%. Advantage: there is a substitution effect toward greater work effort; disadvantage: there is an income effect toward lower work effort.
Suppose that the government institutes a program to help unemployed workers learn new skills, find new jobs, and relocate as necessary to take the new jobs. a. If this program reduces structural unemployment, what is the effect on the short-run Phillips curve and the long-run Phillips curve? b. The government program is expensive, and critics argue that a cheaper way to cut unemployment would be by monetary expansion. Comment on which method would be permanent or temporary.
The program would shift the short-run Phillips curve to the left and shift the long-run Phillips curve to the left. The government program would have a permanent effect; monetary expansion would have a temporary effect.
How does the use of inflation targeting improve central bank credibility? What is the main disadvantage of inflation targeting?
The public can easily observe whether the central bank has achieved its goals. The central bank may not know exactly how to change policy to hit its goals and the public may not know at any time if the Fed is engaging in the best policy.
Define monetary base: How does the monetary base differ from the money supply?
The total amount of currency held by the non-bank public and money held by banks as reserves. The money supply equals the monetary base times the money multiplier.
The main difference between a real shock and a nominal shock is that According to the real business cycle theory, which one of the following shocks is not considered to be a productivity shock?
a real shock is a disturbance to the real side of the economy that affects the IS curve or the FE line, while a nominal shock is a disturbance to money supply or money demand that affects the LM curve. Changes in the real demand for money.
When an exchange rate is higher than its fundamental value, it is
an overvalued exchange rate.
Name two strategies for reducing expected inflation. What are the pros and cons of these strategies?
cold turkey and gradualism Cold turkey reduces inflation faster, but at higher cost; gradualism reduces inflation slower, but at lower cost.
A new phone app called "WorkerMatch" reduces the rate of frictional unemployment by making it easier to match available workers with job openings. The decline in frictional unemployment causes the natural rate of unemployment to The decline in frictional unemployment causes the short-run Phillips curve to _____ and the long-run Phillips curve to _____.
decline shift down and to the left; shift left
In what ways is the government debt a potential burden on future generations? What is the relationship between Ricardian equivalence and the idea that government debt is a burden?
distortions from higher future tax rates and lower future capital If the Ricardian equivalence proposition is valid, a tax cut does not cause consumption to rise, so there is no change in national saving.
What conclusion does the basic classical model (with no misperceptions of the price level) allow about the neutrality or nonneutrality of money? In what ways is this conclusion modified by the extended classical model based on the misperceptions theory?
money is neutral in both the short run and the long run anticipated monetary changes are neutral in the short run, but unanticipated monetary changes are not neutral in the short run
Use the LR curve to show the impact of each of the following shocks on the economy in the short run and the long run, following the Keynesian model. Draw a diagram to answer each question. a. An increased investment tax credit designed to stimulate investment is put into place, and the Fed does not change its target for the real interest rate. In the short run, In the long run, b. An increased investment tax credit designed to stimulate investment is put into place, and the Fed changes its target for the real interest rate to keep output from changing in the short run. In the short run, In the long run, c. The expected inflation rate increases, and the Fed keeps its target for the nominal interest rate unchanged. In the short run, In the long run, d. The expected inflation rate increases, and the Fed keeps its target for the real interest rate unchanged. In the short run, In the long run,
output increases and the real interest rate does not change output does not change and the real interest rate increases output does not change and the real interest rate increases output does not change and the real interest rate increases output increases and the real interest rate decreases output does not change and the real interest rate does not change output does not change and the real interest rate does not change output does not change and the real interest rate does not change
For the past 35 years, which category of U.S. federal, state, and local government tax receipts has been the largest? For the past 35 years, which category of U.S. federal, state, and local government tax receipts has been the smallest?
personal taxes corporate profit taxes
What are the variables that determine the recommended fed funds rate according to the Taylor rule? How has the Taylor rule performed historically?
recent inflation, the deviation of output from the level of full-employment output, and the deviation of recent inflation from its target of 2% fairly well; when the Fed has set the fed funds rate below that called for by the Taylor rule, inflation has often increased and when the Fed has followed the Taylor rule, inflation has been stable
The amount of output lost when inflation is reduced by one percentage point is known as the Heavy regulation of the labor market by the government is likely to lead to a _____ sacrifice ratio.
sacrifice ratio high
The revenue that the government raises by printing money is called Another name for seignorage is
seignorage. the inflation tax.
Classicals generally believe that fiscal policy A change in fiscal policy may not be effective in stabilizing the economy because of
should not be used to dampen the business cycle. lags
Keynesian economists think the price level adjusts _____ to restore general equilibrium and think that government intervention in the economy is _____. Keynesian economists think the most important shock are _____ shocks and think that the most useful model is _____. Classical economists think the price level adjusts _____ to restore general equilibrium and think that government intervention in the economy is _____. Classical economists think the most important shock are _____ shocks and think that the most useful model is _____.
slowly; vital aggregate demand; an aggregate model rapidly; not warranted aggregate supply; a model with microeconomic foundations
Two extended classical economies (in which the misperceptions theory holds) differ only in one respect. In economy A, money growth and inflation have been low and stable for many years, but in economy B money growth and inflation have fluctuated erratically between very low and very high levels. When producers in economy B observe changes in the prices of goods they produce, from past experience they usually attribute these changes to fluctuations in the overall price level rather than to changes in relative prices of their own goods. Will the slope of the short-run aggregate supply curve for economy B be flatter or steeper than the slope of the curve for economy A? Will the slope of the short-run Phillips curve for economy B be flatter or steeper than the slope of the curve for economy A?
steeper steeper
a. The Solow residual, the most common measure of productivity shocks is b. Which of the following does not cause a change in the Solow residual?
strongly procyclical A change in expectations.
According to Keynesian business cycle theory,
the procyclical behavior of labor productivity occurs due to firms' labor hoarding practices.
Define nominal exchange rate. Define real exchange rate. How are changes in the real exchange rate and the nominal exchange rate related?
the rate at which two currencies can be exchanged for each other in the market. the price of domestic goods relative to foreign goods. Enom/Enom = e/e +Pifor - pi
Which of the following is NOT a source of uncertainty affecting monetary policy?
the size of the central bank's balance sheet
What is the fundamental value of a currency? What does saying that a currency is overvalued mean? Why is an overvalued currency a problem? What can a country do about an overvalued currency?
the value of the exchange rate that would be determined by free-market forces of demand and supply without government intervention when the official exchange rate is higher than its fundamental value the central bank will have to buy the currency with official reserve assets the country can change the official exchange rate, restrict international transactions, or use contractionary monetary policy
Which concept of the government budget deficit indicates what the government budget deficit would be (given the tax and spending policies currently in force) if the economy were operating at its full-employment level? In a recession, which deficit concept tends to rise relative to the other one, the full-employment deficit or the actual deficit? actual deficit
the full-employment deficit
According to the theory of rational expectations, According to the classical model, what implications do rational expectations have for the ability of the central bank to use monetary policy to smooth business cycles?
the public's forecasts of various economic variables are based on reasoned and intelligent examination of available economic data. The central bank will not be able to surprise the public systematically, and so it cannot use monetary policy to stabilize output.
Generalizing from your answers above, an increase in foreign output causes the domestic nominal exchange rate to _____; an increase in domestic output causes the domestic nominal exchange rate to _____.
increase; decrease
Describe three alternative responses available to policymakers when the economy is in recession. What happens in the long run if policymakers make no change in macroeconomic policy? What happens in the long run if policymakers increase the money supply appropriately? What happens in the long run if policymakers increase government purchases appropriately?
(1) make no change in macroeconomic policy, (2) increase the money supply, or (3) increase government purchases. the price level will be lower and employment will return to its full-employment level the price level will be unchanged and employment will return to its full-employment level the price level will be unchanged and employment will return to its full-employment level
According to the Keynesian IS-LM model, what is the short-run effect of of the following shock: on output, the real interest rate, employment, and the price level. A severe water shortage causes sharp declines in agricultural output and increases in food prices. A temporary beneficial supply shock affects most of the economy but no individual firm is affected sufficiently to chnage its prices in the short-run
Output: Decrease Real Interest Rate: Increase Employment: Decrease Price Level: Increase
Classical economists argue that using fiscal policy to fight a recession doesn?t make workers better off. Suppose, however, that the Keynesian model is correct. Relative to a policy of doing nothing, does an increase in government purchases that brings the economy to full employment make workers better off? How does your answer depend on (a) the direct benefits of the government spending program and (b) the speed with which prices adjust in the absence of fiscal stimulus?
Yes, because full employment is restored quickly, whereas if the price level must adjust, it may take a long time for full employment to be restored. The more beneficial are government purchases, and the longer the free market takes to restore equilibrium, the more likely such a program is to increase economic welfare.
According to the original Phillips curve, policymakers could ____ unemployment at the cost of _____. According to the expectations-augmented Phillips curve, in the long run, policymakers
reduce; higher inflation cannot affect the unemployment rate.
Which of the following is NOT an example of government capital? Which type of government capital does the U.S. government mostly invest in? equipment Which type of government capital do state and local governments mostly invest in? structures
ten-year Treasury bonds
a. The U.S. government sells F-16 fighter planes to a foreign government: b. A London bank sells yen to, and buys dollars from, a Swiss bank: c. The Federal Reserve sells yen to, and buys dollars from, a Swiss bank: d. A New York bank receives the interest on its loans to Brazil: e. A U.S. collector buys some ancient artifacts from a collector in Egypt: f. A U.S. oil company buys insurance from a Canadian insurance company to insure its oils rigs in the Gulf of Mexico: g. A U.S. company borrows from a British bank:
+ entry in current account no entry + entry in financial account + entry in current account - entry in financial account - entry in current account + entry in financial account
Consider two large open economy, the home economy and the foreign economy. Which of the following lowers the world real interest rate (rw)?
A decrease in the domestic expected marginal product of capital.
Which of the following causes the aggregate supply of labor to shift to the right?
A decrease in the expected future real wage.
Which of the following best describes a general equilibrium?
All markets are simultaneously in equilibrium.
Use the IS-LM model to determine the effects of an increase in the expected rate of inflation. Show the effects on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level.
As expected inflation increases, money demand declines, so the LM curve shifts down and to the right. To restore general equilibrium, the price level rises and the LM curve shifts up and to the left. General equilibrium is restored at the full employment level of output. Hence, the real wage, employment, and output are unchanged. When general equilibrium is restored, the real interest rate remains unchanged and so consumption and investment are also unaffected. Only the price level increases.
Which of the following will cause an increase in the amount of money that one wishes to hold?
a reduction in the interest rate increase.
Consider the impact of a temporary adverse supply shock on the economy. The shock is most likely to affect the In the short run, before general equilibrium is restored, the FE line shifts _____ and causes _____. After general equilibrium is restored, output is _____ and the real interest rate is _____. (Compare with the situation before the shock.)
FE line. left; no change in output or the real interest rate lower; higher
A temporary increase in the wage rate is likely to increase the amount of labor supplied. This is because for temporary wage changes, the income effect is likely to be less than the substitution effect. Which of the following statements best states the effect of a permanent increase in the real wage?
For a permanent wage increase, the income effect is likely to exceed the substitution effect, thus the quantity of labor supplied will fall.
How would each of the following affect Helena Handbasket's supply of labor? The value of Helena's home triples in an unexpectedly hot real estate market. Originally an unskilled worker, Helena acquires skills that give her access to a job with a higher hourly wage. (Assume that her preferences about leisure are not affected by the change in jobs.) A temporary income tax surcharge raises the percentage of her income that she must pay in taxes, for the current year only. (Taxes are proportional to income in Helena's country.)
Helena will supply less labor due to the income effect. The effect on Helena's labor supply is ambiguous because substitution and income effects go in opposite directions in this case. Helena is likely to supply less labor because short-run substitution effects are likely to exceed income effects.
Which of the following are the main sources of economic growth, according to the growth accounting system? I. Growth in capital II. Growth in labor III. Growth in productivity IV. Growth in natural resources
I, II and III
Which of the following statements below describe what is meant by a steady state, in terms of the Solow model? (Assume there is no productivity growth) I. Output per worker = consumption per worker = capital per worker. II. Output per worker, consumption per worker and capital per worker are constant. III. Output per worker, consumption per worker and capital per worker all grow at the same positive rate. IV. Total output, total consumption and total capital all grow at the same rate (the growth of the labor force).
II and IV
After a boat rescues everyone else from Gilligan's Island, the Professor and Gilligan remain behind, afraid of getting shipwrecked again with the same bunch of people. The Professor grows coconuts and catches fish. Last year he harvested 1500 coconuts and caught 500 fish. He values one fish as worth two coconuts. The Professor gave 300 coconuts to Gilligan in exchange for help in the harvest, and he gave Gilligan 50 fish in exchange for collecting worms for use in fishing. Gilligan consumed all his coconuts and fish.
In terms of fish, the GDP of Gilligan's Island is 1250. In terms of fish, consumption on Gilligan's Island is 1250, and investment is 0. In terms of fish, the income of the Professor is 1050, and the income of Gilligan is 200.
Which of the following equations represents the labor demand curve?
ND = 506.25/w2
What is the difference between gross investment and net investment? Can gross investment be positive when net investment is negative?
Net investment is the overall increase in the capital stock;Yes.
The discovery of a new technology increases the expected future marginal product of capital (MPK Superscript fMPKf). a. Use the classical IS-LM model (with no misperceptions) to determine the direct effects of such an increase in the expected future marginal product of capital on the following curves. Answer only concerning which curves are directly affected by the change in the MPK Superscript fMPKf; do not list curves that shift to restore general equilibrium. b. Using the classical IS-LM model (with no misperceptions), determine the general-equilibrium effects of an increase in the expected future marginal product of capital on the following variables: c. Under the misperceptions theory, an increase in expected future marginal product of capital causes all of the following in general equilibrium except that
The LRAS curve does not shift. The FE line does not shift. The LM curve does not shift. The IS curve shifts up and to the right. The AD curve shifts up and to the right. Employment remains unchanged. Output remains unchanged. The price level increases. The real interest rate increases. Consumption decreases. Investment increases. the SRAS and LRAS curves do not shift, the AD curve shifts up and to the right, the price level increases, but output remains unchanged at the full-employment level.
Which of the following statements is an incorrect description of the difference between the CPI price index and PCE price index?
The PCE price index is subject to substitution bias, while the CPI price index is not.
How did cigarette shipments affect the price level (the prices of goods in terms of cigarettes) in the POW camp? On some occasions the prisoners knew in advance when the cigarette shipments were to arrive. What happened to the demand for cigarette money and the price level in the camp in the days just before an anticipated shipment?
The price level rose. demand for money declines; the price level rises
How are desired consumption and desired saving affected by increases in current income, expected future income, and wealth?
When current income rises, desired consumption increases and desired saving increases When expected future income rises, desired consumption increases and desired saving decreases When wealth rises, desired consumption increases and desired saving decreases
Okun's law states that the gap between output and full-employment output increases by 2% for each 1% that the unemployment rate increases. Why does a 1% increase in unemployment lead to twice as large an effect on output?
When cyclical unemployment is rising, other factors such as the labor force and worker hours tend to be falling, further reducing output.
Under the rational-expectations hypothesis,
a central bank cannot surprise the public systematically, and hence cannot use monetary policy to stabilize output.
When economists say that money is neutral, this means that:
a change in the money supply changes nominal variables but not real variables.
What are the two components of a theory of business cycles?
a description of shocks and how the economy responds to the shocks
An unemployment spell is and unemployment duration is
a period of time that a person is continually unemployed the length of time that a person is continuously unemployed
All of the following can shift the LM curve down and to the right except
a reduction in money supply.
What two explanations of productivity growth does endogenous growth theory offer? How does the production function in an endogenous growth model differ from the production function in the Solow model? In the Solow model, the production function _____, while in the endogenous growth model, the production function _____.
accumulation of human capital and technological innovation exhibits diminishing marginal productivity; does not exhibit diminishing marginal productivity.
What implications do these differences in beliefs have for the types of shocks that cause most recessions? Classical economists think that _____ shocks cause recessions, whereas Keynesian economists think that _____ shocks cause recessions.
aggregate supply; both aggregate demand and aggregate supply
An increase in the saving rate will affect which of the following variables in the long run?
all of the above. (I, output per worker, capital per worker)
The efficiency wage is: An assumption about worker behavior behind the efficiency wage theory is that effort is directly related to the worker compensation.
an amount that maximizes effort or efficiency per dollar of real wages.
Which of the following would increase the public's expected rate of inflation? All else being equal, how would this increase in the expected inflation rate affect interest rates?
an increase in money growth increase the nominal interest rate
Which of the following outcomes of a change in the government budget deficit would increase the current account deficit of a small open economy? If a change in the government budget deficit changes the current account deficit of a small open economy, by how much does the current account deficit change?
an increase in the budget deficit that reduces national saving. By the amount that national saving changes.
According to the misperceptions theory, producers are unable to determine whether an increase in prices is an increase in relative prices or an increase in the general price level. This inability generates:
an upward sloping short-run aggregate supply curve.
Each of the following is a principal professional activity of macroeconomists EXCEPT
analyzing a firm's pricing decisions.
Consider a permanent increase in government purchases of 100 per year (in real terms). The increase in purchases is financed by a permanent increase in lump-sum taxes of 100 per year. a. As compared with a temporary increase in government purchases that is also financed by a tax increase, such a permanent increase in government purchases b. Because the tax increase is permanent, assume that at any constant levels of output and the real interest rate, consumers respond by reducing their consumption each period by the full amount of the tax increase. Also, assume that investment is unaffected by any change in government purchases. Under these assumptions, determine how a permanent increase in government purchases affect the following curves: c. Suppose that after such a permanent increase in taxes, consumers respond by reducing their consumption each period by less than the full amount of the tax increase, in contrast to the behavior assumed in part b. Also, suppose that investment is unaffected by any change in government purchases. Under these assumptions, determine how a permanent increase in government purchases financed by a permanent increase in taxes affect the following curves: d. Assume that consumers respond to permanent increase in taxes by reducing their consumption in each period by the full amount of the tax increase. Also assume that investment remains unchanged. Using the classical IS-LM model determine the effects of a permanent increase in government purchases which is financed by an increase in taxes, on the following curves: e. Determine the effects of a permanent increase in government purchases financed by a permanent increase in lump-sum taxes on the following variables in the current period, assuming that consumers respond to permanent increase in taxes by reducing their consumption in each period by the full amount of the tax increase and assuming that investment remains unchanged. f. Consider a permanent increase in government purchases of 100 per year (in real terms). The increase in purchases is financed by a permanent increase in lump-sum taxes of 100 per year. Assume that after such a permanent increase in taxes, consumers respond by reducing their consumption each period by less than the full amount of the tax increase. Also, assume that investment is unaffected by any change in government purchases. As a result of these fiscal changes
causes a larger income effect than a temporary increase in government purchases. The national saving curve does not shift. The IS curve does not shift. The national saving curve shifts to the left. The IS curve shifts up and to the right. The FE line shifts to the right. The IS curve does not shift. The LM curve shifts down and to the right. Output increases. The price level decreases. The real interest rate decreases. the IS curve shifts up and to the right and the FE line shifts to the right; output increases, but the effects on the price level and real interest are ambiguous; they depend on the relative shifts of the IS curve and the FE line.
In the classical model with misperceptions, in the short run, an unanticipated increase in the money supply:
causes the aggregate demand curve to shift up and to the right, leaving the short-run aggregate supply curve unchanged.
The IS curve represents:
combinations of output and the real interest rate such that desired national saving is equal to desired investment.
What effect does a temporary increase in government purchases -- for example, to fight a war -- have on desired consumption and desired national saving, for a constant level of output? Assume that Ricardian equivalence holds. What is the effect on desired consumption and desired national saving of a lump-sum tax increase? Assume that Ricardian equivalence holds. (Complete the table below).
decrease, decrease no change, no change
Private saving is equal to National saving is equal to
disposable income minus consumption. government saving plus private saving.
According to the classical theory, a temporary increase in government purchases According to the classical theory, a temporary increase in government purchases
does not affect labor demand but increases labor supply, lowers the real wage, and increases employment. shifts the IS curve up and to the right and the FE line to the right. If the shift of the FE line is smaller than the shift to the right of the IS curve, it leads to an increase in the real interest rate and an increase in the price level.
National wealth is equal to
domestic physical assets plus net foreign assets.
Which policy would decrease national saving?
exchanging sales taxes for higher taxes on interest and dividends
You just read that forecasters predict the United States will run a current account surplus in 2025. From this you would infer that the United States will also
increase its net foreign assets in 2025.
According to the expectations theory of the term structure of interest rates Why isn't the expectations theory sufficient to describe the data on interest rates that we observe?
investors compare bonds with different times to maturity and choose the ones that yield the highest return. on average, long-term interest rates exceed short-term interest rates
In the classical model, money is neutral. This seems to be inconsistent with the business cycle fact that:
money is a leading, procyclical variable.
If Ricardian equivalence holds, a reduced government budget deficit caused by a lump-sum tax increase in an open economy leads to If Ricardian equivalence does not hold, a reduced government budget deficit caused by a lump-sum tax increase in an open economy leads to
no change in the current account balance. a rise in the current account balance.
Assume that prices and wages adjust rapidly so that the labor market, the goods market, and asset market are always in equilibrium. What are the effects of each of the following events on output, the real interest rate, and current price level?There is a temporary increase in government purchases. There is a reduction in expected inflation. There is a temporary increase in labor supply. There is an increase in the interest rate paid on money.
no change in output; an increase in the real interest rate; an increase in the price level no change in output; no change in the real interest rate; a decrease in the price level an increase in output; a decrease in the real interest rate; a decrease in the price level no change in output; no change in the real interest rate; decrease in the price level
For constant output, if the real money supply exceeds the real quantity of money demanded at some initial real interest rate,
people with excess money balances purchase nonmonetary assets, thus increasing the market price of the nonmonetary assets and reducing the real interest rate until an equilibrium is reached.
What problem does government control of prices create for economists attempting to measure a country's GDP? In countries in which people grow their own food, make their own clothes, and provide services for one another within a family or village group, why might official GDP figures underestimate these nations' actual GDPs?
prices do not measure market value such goods and services are not sold on the market, making their value difficult to measure
Given it = 55%, Pt = 130.0130.0, Pt+1 = 132.6132.6 and Upper P Subscript t plus 1 Superscript ePet+1 = 133.9133.9, calculate the expected real interest rate in period t:
r=2
In order to explain the link between money growth and economic expansion, real business cycle theorists use the concept of:
reverse causation.
Two countries are IDENTICAL in every way except that one has a much higher capital-labor ratio than the other. According to the Solow model, which country's total output will grow more quickly? Does your answer depend on whether one country or the other is in a steady state? In general terms, how will your answer be affected if the two countries are allowed to trade with each other?
the country with the lower capital-labor ratio No. The country with the lower capital-labor ratio will always grow faster. both countries will grow even faster
The full-employment level of employment is:
the equilibrium level of employment reached after all wages and prices have fully adjusted.
The term saving refers to The term savings refers to
the flow of funds that is not consumed out of income. the stock of funds that represents the accumulated amount of net saving over time.
The unemployment rate is The labor force participation rate is The employment ratio is
the fraction of the labor force that is not employed. the fraction of the adult population that is in the labor force. the fraction of the adult population that is employed.
Summary: A rise in the depreciation rate causes the steady-state capital-labor ratio to fall,steady-state output per worker to fall,and steady-state consumption per worker to fall .
yup
Colonel Hogwash purchases a Civil War-era mansion for $1,000,000. The broker's fee is 6%, which the colonel also pays, for a total expenditure of $1,060,000. Using the expenditure approach, this transaction would be recorded as a? According to the income approach, this transaction would be recorded as a? According to the product approach, this transaction would be recorded as a?
$60,000 increase in residential investment. $60,000 increase in income received by the real estate broker. $60,000 increase in domestic value added by the brokerage service.
It country A has greater net foreign assets per citizen than does country B, is country A necessarily better off than country B?
No; total national wealth is what matters
In a Solow-type economy, total national saving, St, is Upper S Subscript t Baseline equals sY Subscript t Baseline minus hK Subscript tSt=sYt−hKt The extra term, hKt, reflects the idea that when wealth (as measured by the capital stock) is higher, saving is lower. (Wealthier people have less need to save for the future.) What is the effect on the steady-state of an increase in h? What is the effect on the steady-state value of per-worker capital? What is the effect on the steady-state value of per-worker output? What is the effect on the steady state of per-worker consumption?
per-worker capital decreases per-worker output decreases per-worker consumption decreases
Which of the following expressions characterizes the steady state capital-labor ratio? If the government permanently increases purchases per worker (an increase in g), Output per worker Capital per worker Consumption per worker
s[f(k) − g] = (n + d)k is lower in the steady state. is lower in the steady state. is lower in the steady state.
The chief economic advisor of a small open economy makes the following announcement: "We have good news and bad news: The good news is that we have just had a temporary beneficial productivity shock that will increase output; the bad news is that the increase in output and income will lead domestic consumers to buy more imported goods, and our current account balance will fall." Analyze this statement, taking as given that a beneficial productivity shock has indeed occurred. The shock _____ the desired saving curve _____ . The shock _____ the desired investment curve _____ . The current account balance _____ because the equilibrium amount of saving _____ and the equilibrium amount of investment _____.
shifts; to the right does not shift; at all rises; rises; is unchanged