Econ midterm 1, ch 1-6
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.
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.
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
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
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
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.
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.
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.
All of the following can shift the LM curve down and to the right except
a reduction in money supply.
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.
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
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.
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.
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
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.
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.
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 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.
Which of the following is NOT a reasonable explanation for the Great Moderation?
higher oil prices
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?
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.
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.
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 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
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.
Define the velocity of money.
Define the velocity of money. stable
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
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.
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
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
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
What two explanations of productivity growth does endogenous growth theory offer?
accumulation of human capital and technological innovation
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
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)
Each of the following is a principal professional activity of macroeconomists EXCEPT
analyzing a firm's pricing decisions.
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.
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
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
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
Since U.S. investment is generally higher than U.S. national saving:
the U.S. current account balance is generally negative.
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 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.
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 .
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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.