Macro Final 4

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6. Actual GDP is ________ to potential GDP. a. rarely not equal d. rarely equal b. always equal e. Not enough information is given. c. always not equal

Assuming the current rate of economic growth continues, the average college student will have a lifetime income ________ that of his or her parents. a. five times d. about twice b. ten times e. half c. about the same as

What is lower steady state production caused by?

Faster depreciation.

Explain Seignorage and the inflation tax...

Names for the revenue that the government obtains from printing more money (ΔM) The inflation tax - Shows up as a rise in the price level - Is paid by people holding currency

An allocation that is ________ exists if there is no way to change a resource allocation that makes someone worse off when allocating more to another.

Pareto optimal

By purchasing a fixed-rate 30-year mortgage, inflation risk is:

Passed from the borrower to the lender

In an economy patents help to do what... And what are some of the problems with this...

Patents help to... - Grant monopoly power over a good for a period - Generate positive profits - Provide incentive for innovation However, due to monopoly power, P > MC and hence there will be a welfare loss Other incentives may avoid welfare loss such as Government funding or Prizes

Which of the following best answers whether growth in the labor force leads to overall economic growth?

Population growth can produce growth in the Solow model in the aggregate but not in output per person.

In the steady-state, capital accumulation is zero. True False

True

In the quantity equation, the value PtYt is: a. real GDP. b. nominal GDP. c. aggregate expenditure. d. the velocity of money. e. real money.

Let R denote the real interest rate and i denote the nominal interest rate; these two interest rates are related by: a. i = π. b. i = R − π. c. i = R + π. d. i = R/π. e. None of these answers is correct.

Let r denote the real interest rate, i denote the nominal interest rate, and pi denote the rate of inflation. The equation i=r+pi is called: a. the money supply d. the quantity theory of money b. the quantity equation e. money neutrality c. the Fisher equation

M2 includes M1 and: a. large time deposits d. long-term bonds b. overnight repurchase agreements e. gold reserves c. saving accounts

Money that has no intrinsic value except as money is called ________ money. a. bonded b. commodity c. fiat d. intrinsic e. None of these answers is correct.

With an average annual growth rate of 5 percent per year, per capita income will increase by what factor over a century?

128 Applying the Rule of 70 implies 70/5 = 14. Thus, income will double in 14 years. In a century, per capita income will double approximately 7 times, which is 100/14. Thus, GDP per capital will increase by a factor of 2 7.

When did Robert Solow create the Solow model?

1950s.

When did Robert Solow win the Nobel Prize?

1987.

When did Paul Romer create the Romer model?

1990s.

b. should fire some labor until MPL =w.

1f MPL < w, the firm: a. has the optimal amount of labor b. should fire some labor until MPL=w c. should fire some labor until MPL=0 d. should hire more capital until MPK = 0 e. should hire more capital until MPL=w

b. can be consumed by more than one person at a time.

1n economics, a nonrival good is one that: a. cannot be consumed by more than one person at a time. b. can be consumed by more than one person at a time. c. can be consumed by more than one person at a time but is congested. d. cannot be consumed by more than two people at a time. e. None of these answers is correct.

b. an immediate increase in output and output growth will slow.

1n the Romer model, if an economy's share of researchers decreases, there will be: a. an immediate decrease in output and output growth will slow. b. an immediate increase in output and output growth will slow. c. an immediate increase in output and output growth will accelerate. d. an immediate decrease in output and output growth will accelerate. e. no change in output but output growth will slow.

If population doubles every 35 years, then the growth rate of population is

2 percent The Rule of 70 implies that the growth rate equals 70/35 = 2%.

If Y = AK 1/3 L 2/3 and A grows at a rate of 1 percent per year, K grows at a rate of negative 3 percent per year and L grows at a rate of 3 percent per year, then the growth rate of Y is

2 percent The growth rate formula for such a production function is g( Yt) = g( At) + (1/3)* g( Kt) + (2/3)* g( Lt). The first two terms cancel and we are left with (2/3)*(3).

Figure 5.5 represents two countries, 1 and 2. Country ________ has a higher depreciation rate and, therefore, has a ________ steady state than the other country.

2; lower

Over the past 50 years, Brazil's population growth rate has averaged about 2.3 percent. According to the rule of 70, Brazil's population will double in about _____________ years.

Over the past 50 years, Brazil's population growth rate has averaged about 2.3 percent. According to the rule of 70, Brazil's population will double in about ________ years.

30 percent 70/2.3=30 percent

consider a perfectly competitive economy with a production function Y=AK 1/3 L2/3. There are 27 workers who produce cream cheese (a numeraire good) with 125 units of capital. If the productivity parameter is equal to 1 and the economy produces 40 tons of cream cheese in equilibrium, what is the sum of the total payments to capital and labor?

40 tons of cream cheese Since the numéraire good is cream cheese, all prices are expressed in tons of cream cheese. Total payments to capital and labor (w*L + r*K) are also expressed in tons of cream cheese. In equilibrium the sum of payments to capital and labor is equal to total production.

The natural rate of unemployment is decomposed into: a. cyclical and frictional unemployment b. structural and seasonal unemployment c. structural and frictional unemployment d. seasonal and frictional unemployment e. structural, frictional, and seasonal unemployment

The price controls imposed by the Nixon administration lasted for: a. four weeks d. one year b. six months e. two years c. ninety days

If population and GDP are growing at the same rates, then per capita GDP does not grow.

true

If real GDP increases by 2 percent and nominal GDP increases by 4 percent, then inflation is approximately 2 percent.

true

If real GDP is growing at a rate of 2 percent, the central bank should grow the money supply at a rate of 2 percent to keep prices unchanged.

true

Keynesian economists believe in fiscal policy.

true

When comparing GDP across countries, it is better to use comparisons based on common prices than simply on exchange rate conversions.

true

In the Solow model, if net investment is positive:

capital accumulation is positive

The two main inputs we consider in a simple production function are:

capital and labor

In our balloon analogy, the air being pumped into the balloon represents: a. total exports. b. real or potential GDP. c. the monetary base. d. the money supply.

A person is unemployed if they...

do not have a job that pays a wage or salary has actively looked for a job in the last 4 weeks is available to work

A person is unemployed if she...

does not have a job that pays a wage or salary has actively looked for a job in the last 4 weeks is available to work

A production function exhibits constant returns to scale when you:

double each input—you double the output.

In the Solow model, defining s(bar) as the saving rate and Y(t) as output, consumption is given by s(bar)Y(t).

false

In the Solow model, if gross investment is equal to capital depreciation, the economy accumulates new capital.

false

Milton Friedman was a Keynesian economist.

false

When the trade balance is negative, domestic producers are exporting more goods than are being imported.

false

If we define the saving rate as s, output as F(K,L), and the depreciation rate as d and if sF(K,L)> dK, the economy is:

growing.

In the Solow model, if (It>DKt) , the capital stock:

grows

Suppose k and l grow at constant rates given by gk and gl .What is the growth rate of y if

gy = agk -(1-a)gl

Suppose k, l, and A grow at constant rates given by gbark, gbarl and gbarA. What is the growth rate of y if y = A k^a l^(1−a) When a > 0?

gy = gbarA + agbark + (1 − a) gbarl

What is the equation that relates nominal and real GDP? And what is the GDP deflator?

nominal GDP = price level x real GDP The GDP deflator is the price level that satisfies this equation.

Structural Unemployment

obsolete job skill sets

The president of Tunisia asks you to suggest an idea to improve the economy's growth without worrying about decreasing returns. You suggest:

offering firms an incentive to produce new ideas.

Because there are no diminishing returns in the stock of ideas in the Romer model:

old ideas continue to contribute to current economic growth.

As a rough approximation, differences in capital per person explain about ________ of the difference in incomes between the richest and poorest countries, while differences in ________ explain ________.

one-third; total factor productivity; two-thirds

Relating to The Empirical Fit of the Production Function If the productivity parameter is 1, the model ____________ GDP per capita.

over predicts

The inflation rate is calculated as the

percent change in the price level.

In the Solow model, the steady-state capital stock is a function of:

productivity, the depreciation rate, the labor stock, and the saving rate.

The reason perfect competition cannot generate new ideas is that:

profits are zero.

The monetary base consists of

reserves and currency.

A firm's profit is simply defined as:

revenues minus costs

In the past 60 years or so, labor's share of GDP in the United States has been...

roughly two-thirds.

M2 includes M1 and

savings account.

An increase in ________ leads to a higher steady-state capital stock, and a decline in ________ leads to a lower steady-state capital stock.

savings rate; productivity

How do we calculate the labour force?

sbar/(sbar + fbar) Where... sbar = separation rate fbar = finding rate

Nominal gross domestic product is defined as the value of all goods and...

services produced by an economy, within its borders, over a period of time, at current prices.

In the Romer model in Figure 6.2, at time t0, a change in the shape of the production function can be explained by an increase in the:

share of labor engaged in research.

If MPK>r, the firm:

should hire more capital until MPK=r

In Figure 5.1, if the economy begins with the initial capital stock at K2, the capital stock will ________ and the economy will ________.

stay constant; be in its steady state

In the Solow model, if, in the absence of any shocks, the capital stock remains at K* forever, this rest point is called the:

steady state.

The amount of capital in an economy is a(n) ________, while the amount of investment is a(n) ________.

stock; flow

A lower level of TFP implies...

that workers produce less output for any given level of capital per person.

The velocity of money is

the average number of times a dollar is used in a transaction per year.

Hyperinflation can be caused by

the central bank injecting to much money into the economy. a collapse of real output. *both answers.

The marginal product of the labor curve represents:

the demand for labor

The revenue governments obtain from printing money is called

the inflation tax

The real interest rate is equal to...

the marginal product of capital and Is paid in goods

In the long run, the key determinant of the price level is

the money supply

Using the Solow model, if, in time t = 0, the initial capital stock is K0 =100, investment is I0 = 25, and d=0.1 is the depreciation rate, capital accumulation from period 0 to period 1 is:

ΔK1 = 15.

Suppose that nominal GDP is $5,000 and the velocity of money is equal to 5. According to the quantity theory of money, what is the amount of money in circulation?

$1,000

GDP does not include...

- Government transfer payments to individuals. • Pensions, social benefits, unemployment insurance - A measure of the health of a nations people. - Changes in environmental resources.

Consider a simple economy producing 2 goods: coffee and TVs. In 2014 the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on this information the percentage change in real GDP in chained prices benchmarked to 2015 is:

-16.5 percent FEEDBACK: Pages 29-33; Table 2.4.Real GDP 2014 using 2014 prices = 2,000x6 + 10x1,000=22,000Real GDP 2015 using 2014 prices = 1,000x6 + 12x1,000=18,000Percentage change = (18,000-22,000)/22,000= -18%Real GDP 2014 using 2015 prices = 2,000x5 + 10x1,000=20,000Real GDP 2015 using 2015 prices = 1,000x5 + 12x1,000=17,000Percentage change = (17,000-20,000)/20,000= -15%Percentage change in real GDP in chained prices benchmarked to 2015 is the average of the two growth rates = (-18 -15)/2 = - 16.5%

Using the expenditure approach, investment includes:

. fixed firm and household structures, equipment, and inventories

. Actual GDP is ________ to potential GDP.

. rarely equal

Which of the following is an example of a ratio scale?

1, 5, 25, 125, 625.

Between 1970 and 1976, Israel's average inflation rate was about 65 percent per year. With that rate of inflation, prices would double about every ________ years, using the rule of 70.

1.1

The president of the World Bank has asked you to calculate the average per capita GDP growth rate of Rwanda from 1980 to 2010. In 1980, per capita GDP was about $728 and in 2010 was about $1,025. You tell him the average growth rate of per capita GDP is about ________ percent

1.1 (1025/728)^1/30-1=1.1 percent

If the production function is given by Y=AK^1/3L^2/3, the saving rate, s, is 20 percent; the depreciation rate, d, is 10 percent; and A=L=1, the steady-state level of output is:

1.4

For the years 1995-2007, if output per person in the private sector grew 2.7 percent, the contribution of the capital-labor ratio was 1.1 percent, and the change in the labor composition accounted for 0.2 percent of that growth, what was the growth rate of total factor productivity?

1.4 percent FEEDBACK: Pages 157-158; Table 6.2. We can decompose the growth rate of per capita GDP into the growth rate of TFP, the growth rate of capital, and the growth rate of workers. Therefore, in this example the contribution of TFP is equal to 2.7%-1.1%-0.2%=1.4%

Economic growth can be useful in describing why: a. Europeans are better off in 2007 than they were in 1907 and why Europeans are better off than Thais b. Europeans are better off in 2007 than they were in 1907 and why Europeans are worse off than Thais c. Europeans are better off in 2007 than they were in 1907 d. Europeans are worse off than Thais e. Europeans are worse off in 2007 than they were in 1907 and why Europeans are better off than Thais

Which of the following people benefits from a surprise increase in inflation?

A person who borrowed large amounts of money on a fixed payment schedule Pages 218-219. Borrowers with fixed interest rate loans are winners because they can repay their debts using the newer and cheaper dollars.

Negative inflationary surprises lead to:

A redistribution of wealth from borrowers to lenders

In 2005, prices adjusted for inflation; the U.S. per capita GDP was about ________ in 1870, and by 2012 it had grown to about ________. a. $500; $37,000 d. $10,000; $37,000 b. $2,800; $43,000 e. $100; $100,000 c. $500; $17,000

What country or countries do the following characteristics possibly describe? • Life expectancy at birth is under 50 years. • More than 90 percent of households do not have electricity. • Fewer than 10 percent of young adults have graduated from high school. a. Kenya d. Russia b. the United States in the late 1800s e. All of these answers are correct. c. Bangladesh

Output per capita and output per worker are A Always equal B Equal in the production model, but output per capita is smaller in general C Equal in general, but output per capita is smaller in the production model D Not equal, because output per capita is always greater

B Equal in the production model, but output per capita is smaller in general

he United States and Chile have both grown at about 2 percent per year for the last 40 years. By the principle of transition dynamics, what does this imply?

Both countries are at their steady states.

c. $10,000

By how much does the current GDP rise in the following scenario? A real estate agent sells a house for $250,000 that the previous owners had purchased 10 years earlier for $90,000. The real estate agent earns a commission of $10,000. a. $160,000 d. $90,000 b. $250,000 e. $260,000 c. $10,000

18. According to the income approach to GDP, the largest percentage of GDP comes from: a. indirect business taxes d. depreciation of fixed capital b. firm profits e. None of these answers are correct. c. compensation to employees

21. If France's per capita GDP is $5,000 in 1950 and Portugal's is $2,500, but Portugal is growing faster, the expectation that sometime in the future Portugal's per capita GDP will equal that of France is called economic: a. growth d. dynamics b. divergence e. justice c. convergence

24. Suppose x grows at a rate g=5 percent and y grows at a rate g=12 percent. If z = y ´ x, then z grows at ________; if z = x/y, z grows at ________. a. 7 percent; -17 percent d. 60 percent; 42 percent b. -17 percent; 7 percent e. 60 percent; -42 percent c. 17 percent; -7 percent

What are the exponents of a Cobb Douglas function with constant returns to scale? Increasing? Decreasing?

Constant returns: a + b = 1 Increasing returns: a + b > 1 Decreasing returns: a + b < 1

In the Romer model, the growth rates of all endogenous variables are . . .

Constant.

Increasing vs. Constant Returns

Constant: 1% increase in input leads to 1% increase in output. Increasing: 1% increase in inputs leads to greater than 1% increase in output

This year a real estate agent helped you buy a house for $200,000 which was originally built in 1985. The agent's commission was $12,000. How will this transaction affect this year's GDP?

Consumption expenditures will increase by $12,000.

According to the quantity theory of money, the price level can be written as

Pt*=(Mt Vt)/Yt .

The velocity of money can be calculated from the quantity equation with

PtYt /Mt.

The velocity of money can be calculated from the quantity equation with...

PtYt/Mt

To recap, in the Solow Model, what is the Production function?

Q = A(L^α)(K^β) Where α is 1/3 and β is 2/3

Some persons are counted as out of the labor force because they have made no serious or recent effort to look for work. However, some of these individuals may want to work even though they are too discouraged to make a serious effort to look for work. If these individuals were counted as unemployed instead of out of the labor force, then: a. both the unemployment rate and labor-force participation rate would be higher. b. the unemployment rate would be higher ,and the labor-force participation rate would be lower. c. the unemployment rate would be lower, and the labor-force participation rate would be higher. d. both the unemployment rate and labor-force participation rate would be lower.

Formulate the Bathtub Model of Unemployment and explain how it is solved.

Set the change in unemployment to zero Solve the equation for U

b. w*L* + r*K* = Y*

Suppose the payments to capital and labor are (w*L*)/Y* = 2/3 and (r*K*)/Y* = 2/3, respectively. One implication of this result is: a. w*L* + r*K* < Y* b. w*L* + r*K* = Y* c. w*L* + r*K* > Y* d. (w*L*/r*K*) = Y* e. (w*L*/Y*)(r*K*/Y*)=1

The designation "natural" implies that the natural rate of unemployment: a. is desirable. b. is constant over time. c. is impervious to economic policy. d. does not go away on its own even in the long run.

Why is the growth in the combined Solow-Romer is faster than the growth in the Romer model?

The effects of changes in technology are amplified by changes in the capital stock. Technological change changes output, the change in output changes savings, the change in savings changes investment, the change in investment changes the capital stock, and the change in the capital stock changes output again (subject to diminishing returns).

When interpreting the solution to the Cobb-Douglas Production Function, what can be said about The equilibrium rental rate?

The equilibrium rental rate is proportional to output per capital Output per capital = (Y/K)

What do new ideas depend on?

The existence of ideas in the previous period, the number of workers producing ideas, and worker productivity.

Summarise The Principle of Transition Dynamics...

The farther below its steady state an economy is, (in percentage terms), the faster the economy will grow. The closer to its steady state, the slower the economy will grow. Allows us to understand why economies grow at different rates

Explain the history and Beginning of sustained growth

The first sustained economic growth occurred in England in the late 1700s and spread across western Europe over the next few decades. A thousand years ago, living standards were quite equal across countries—incomes differed by a factor of maybe 2. Today, living standards differ by a factor of 30, perhaps as high as 50, across countries.

Which of the following is NOT an endogenous variable in the Romer model?

The productivity of an individual researcher FEEDBACK: Page 148. The fraction of the population engaged in research is an exogenously given parameter.

Imagine increases in the parameters of the Solow model that are all identical in magnitude. Which one of the following parameters will result in the largest increase in steady-state output?

The productivity parameter

What is the productivity parameter?

The productivity parameter measures how efficiently countries are using their factor inputs. total factor productivity (TFP) also known as 'residual' If TFP is ≠ to 1 → better model

Why are rich countries rich?

They have more capital per person. More importantly, they use labor and capital more efficiently.

To be counted as "employed" in the U.S. labor force statistics, a person: a. must be working for pay and be working full time. b. must be working for pay but does not have to be working full time. c. does not have to be working for pay if they are working for a family business but must be employed full time. d. does not have to be working for pay if they are working for a family business and does not have to be working full time

A surprising result of the Solow model is that capital accumulation cannot serve as the engine of growth in the long run. True False

True

If s(bar) is the saving rate, F(Kt, L(bar)) is the production function, and d(bar) is the depreciation rate, the growth of capital can be expressed as change in Kt+1 = s(bar)F(Kt, L(bar)) - d(bar)Kt. True False

True

If the production function is given by Y = K^1/3 x L^2/3, the marginal product of capital is (1/3)( Y/ K). True False

True

If we include population growth in the Solow model, we can model this concept by thinking of population growth as capital depreciation per person. True False

True

In the Solow diagram, an increase in the investment rate will cause a decrease in consumption for all levels of capital. T/F

True

In the Solow model, the equation of capital accumulation is Kt+1 = Kt + It - d(bar)Kt. True False

True

In the Solow model, we generally assume that the capital depreciation rate is the same across all countries. True False

True

The productivity parameter, A(bar), plays a larger role in the Solow model than it does in the production model. True False

True

What are the model dynamics of the Solow model?

When not in the steady state, - the economy exhibits a change in capital toward the steady state. As K moves to its steady state, - output will also move to its steady state. At the rest point of the economy, - all endogenous variables are steady.

in the solow model, what is the steady state?

Where investment = depreciation

Which of the following can explain a rightward shift in the Beveridge Curve? (a) skills mismatch between firms and workers (b) the economy is expanding (c) it becomes easier to search for available jobs (d) duration of unemployment rises

c. The government builds a new highway.

Which of the following counts toward changes in the current GDP? a. You find $10 on the sidewalk. b. You purchase a used stereo from a friend. c. The government builds a new highway. d. You fix your own sink. e. None of these answers is correct.

b. You buy a used car from your parents.

Which of the following does NOT count toward changes in the current GDP? a. A student pays for another year of tuition. b. You buy a used car from your parents. c. The local police station buys new squad cars. d. The Pentagon buys gasoline. e. None of these answers is correct

Which of the following questions does the Solow model NOT help to explain? Why do countries have different growth rates in the same time periods? Why are some countries richer than other countries? Why do countries sustain growth in the long run? Will a country be richer if the investment rate is higher than another country, all else being equal?

Why do countries sustain growth in the long run? Solow shows economies resting in a steady state in the long run and not sustained economic growth

The Solow and Romer models don't answer . . .

Why investment rates and TFP differ across countries.

If Y is a good's output, X is spending to produce a good, F¯ is the fixed cost associated with production, and C is the average cost of production, which of the following production functions exhibits increasing returns?

Y = (X − Fbar)/C

If Y is a good's output, X is total expenditures associated with the production of a good, Fbar is the fixed cost associated with production, and C is the marginal cost of production, which of the following production functions exhibits increasing returns?

Y = (X-Fbar)/C

In the Cobb-Douglas production function A K^α*L^(1-α) y = Y/ L as output per person and k = K/ L as capital per person, the per person production function is...

Y = AK^α

What is the production function in the production model?

Y = AbarK^(1/3)L^(2/3)

What is the national income accounting identity?

Y = C + I + G + NX

The national income accounting identity states...

Y = C + I + G + NX Where Y = GDP (in dollars) C = consumption I = investment G = government purchases NX = net exports = exports - imports

What is the Cobb-Douglas Production Function?

Y = F(K,L) = A K^α*L^(1-α)

According to the expenditure approach, if Y is GDP, C is consumption, I is investment, G is government purchases, and NX is net exports, the national income identity can be written as:

Y=C+I+G+NX

According to Figure 4.5, does the production model accurately predict the level of per capita GDP for Singapore?

Yes, because the predicted value of per capita GDP for Singapore is close to the actual value of its per capita GDP

what is the Excludability of ideas?

You can have Legal restrictions on use of a good or idea Ideas are nonrivalrous but may be excludable

What is the output production function in the Romer model?

Yt = AtLyt

What is the Solow production function?

Yt = F(Kt, Lt) = AbarKt^(1/3)Lt^(2/3)

The constant growth rate rule states that...

Yt = Y0(1 + g-bar)^t t is the time period Yt is the value of variable Y in time t Y0 is the initial value of variable Y in period 0 g-bar is the constant growth rate

Solve the Solow model for the steady state level of output.

Yt* = (s/d)^(1/2)Abar^(3/2)Lbar

What are the four unknowns/endogenous variables in the Romer model?

Yt, At, Lyt, Lat

What are the five unknowns/endogenous variables in the Solow model?

Yt, Kt, Lt, Ct, It

If Ct denotes consumption, It denotes investment, and Yt is output, the resource constraint in the Solow model is:

Yt=. Ct+ It

_______________ unemployment is unemployment that arises due to the time it takes to search for an appropriate job. A Frictional B Cyclical C Structural D Natural

According to the Phillips curve presented in the text, a positive macroeconomic shock: a. increases the rate of inflation b. decreases the rate of inflation c. has no effect on the rate of inflation d. has a negative effect on the unemployment rate e. has a positive effect on the unemployment rate

According to the classical dichotomy, in the long run there is: a. complete separation of the nominal and real sides of the economy. b. no growth after the economy reaches the steady state. c. perfect connectivity between the nominal and real sides of the economy. d. accelerating economic growth. e. zero inflation.

According to the study conducted by Piketty and Saez, the rise in income inequality in recent decades has been largely because: a. of increased compensation for CEOs and from business income. b. of rising capital income. c. of the rise of the "service" economy. d. globalization has exported manufacturing jobs to developing countries. e. of lower borrowing costs.

In the Solow model, in every period, a fraction of total output ________ next period's capital stock, which ________. a. is saved; adds to b. depreciates; adds to c. is saved; reduces d. is consumed; reduces e. is consumed; adds to

In the Solow model, the equation of capital accumulation is: a. Kt+1 = Kt + It - d(bar)Kt b. Kt+1 = Kt + d(bar)Kt - It c. Kt+1 = Kt + It +d(bar)Kt d. change in Kt = It - d(bar)Kt e. Kt + It = Kt+1

In the Solow model, the parameter d(bar) denotes ________ and is ________. a. the depreciation rate; less than one b. the depreciation rate; equal to zero c. investment; less than one d. consumption; greater than one e. investment; greater than one

In the combined Solow-Romer model, an exogenous increase in the saving rate: a. immediately increases the growth rate of per capita output, which eventually slows to its previous rate b. immediately decreases the per capita output, but the growth rate does not change c. increases the growth rate of per capita income, but eventually the economy reaches a new steady-state level of per capita output d. immediately decreases the growth rate of per capita output, which eventually accelerates to a higher rate e. has no impact on the growth rate or level of per capita output

Okun's law shows the ________ relationship between ________ and ________. a. negative; the unemployment gap; economic fluctuations b. positive; the unemployment gap; economic fluctuations c. negative; the unemployment gap; inflation d. positive; the unemployment gap; inflation e. negative; inflation; economic fluctuations

Potential output is defined as: a. the amount of total output if all inputs were utilized at their long-run, sustainable levels b. what an economy produces when it is at capacity c. the current level of output d. the amount of output where inflation is zero e. the level of output when unemployment is 10 percent

Suppose you put $100 in the bank on January 1, 2017. If the annual nominal interest rate is 5 percent and the inflation rate is 5 percent, you will be able to buy ________ worth of inflation-adjusted goods on January 1, 2018. a. $100 b. $90 c. $95 d. $105 e. $110

The cure for hyperinflation is: a. reducing money growth. b. maintaining government spending. c. lower taxes. d. seignorage. e. All of these answers are correct.

The key difference between the Solow model and the production model is: a. the Solow model endogenizes the process of capital accumulation b. the standard model endogenizes the process of capital accumulation c. the Solow model uses different values for the capital share d. the Solow model does not contain a productivity measure e. the Solow model exogenizes the process of capital accumulation

Which is responsible for dating business cycles? a. Business Cycle Committee of the National Bureau of Economic Research b. Business Cycle Committee of the Department of Treasury c. Department of Treasury d. Commerce Department e. Board of Governors of the Federal Reserve System

Which of the following flowcharts best summarizes Romer's description of ideas and growth? a. Ideas->Nonrivalry->Increasing returns->Imperfect competition b. Ideas->Capital->Constant returns->Imperfect competition c. Capital->Rivalry->Increasing returns->Perfect competition d. Ideas->Rivalry->Increasing returns->Perfect competition e. Capital->Nonrivalry->Decreasing returns->Imperfect competition

In Figure 5.2, steady-state consumption is represented by:

a ---- b.

If not all price setters are convinced that high inflation rates will end soon, there is/are...

a coordination problem

If not all price setters are convinced that high inflation rates will end soon, there is/are

a coordination problem.

the quantity theory of money says that a doubling of the growth rate in the money supply will, in the long run, lead to

a doubling of inflation. Page 213. In the long run, changes in the growth rate of money will lead to a one-for-one change in the inflation rate.

The Romer model predicts that a decrease in population will have

a growth effect that decreases the rate of growth. FEEDBACK: Pages 152-153. The example in the text shows that an increase in population results in only an increase in the growth rate. An algebraic solution shows that a decrease in population results in a decrease in the rate of growth.

In the Romer model, if an economy's share of researchers decreases, there will be:

an immediate increase in output and output growth will slow.

A decline in the saving rate causes the steady-state level of output....

and capital to fall.

Why would poor countries ignore intellectual property rights?

as Items or ideas could be obtained cheaply May encourage multinational firms to relocate to developing countries

According to data presented in the text, the country with the lowest number of working hours per week in 2010 was: a. the United States. b. France. c. the United Kingdom. d. Japan. e. Canada.

According to the quantity theory of money, the price level can be written as: a. Pt* = Y(bar) x M(bar)/V(bar) b. Pt* = (M(bar) x V(bar))/Y(bar) c. Pt* = M(bar)/Y(bar) d. Pt* = 1/Y(bar) e. Pt* = M(bar)

Among the world as a whole, there is ________ correlation between how rich a country is and how fast it ________ from 1960 to 2010. a. a strong positive; grew d. a strong negative; contracted b. almost no; grew e. almost no; contracted c. a strong positive; contracted

An implication of the Solow model is that once an economy reaches the steady state, a. long-term growth continues indefinitely b. long-term growth does not continue c. long-term growth accelerates d. long-term growth decelerates e. none of these answers are correct

Fiat money has value because: a. it is backed by gold. b. people believe it has value. c. it has intrinsic value. d. it is backed by silver. e. None of these answers is correct.

Generally, during a recession: a. the employment rate rises. b. the unemployment rate rises. c. there is no change in the unemployment rate. d. inflation rises. e. the natural rate of unemployment rises.

Historically, for most Americans, the length of unemployment is: a. less than one week. b. usually less than three months. c. usually more than one year. d. usually more than three months. e. indefinite.

If Canada and Taiwan have the same fraction of researchers and the same knowledge efficiency parameter but Canada's population is larger, then: a. Taiwan has a higher per capita output growth rate b. Canada has a higher per capita output growth rate c. each country's per capita output grows at the same rate d. Canada has higher per capita income than Taiwan e. Canada's level of income is greater than Taiwan's

If Ct denotes consumption, It denotes investment, and Yt is output, the resource constraint in the Solow model is: a. Yt = Ct - It b. Yt = Ct + It c. Yt = A(bar)Kt^1/3 x Lt^2/3 d. Change in Kt = It - d(bar)Kt e. None of these answers are correct

If the monopsony model assumptions hold as predicted:a. the classical model of no actual involuntary unemployment is true. b. a minimum wage can increase both wages and employment. c. minimum wages are ineffective at raising entry level wages. d. a minimum wage always creates unemployment and is harmful to the economy.

If there are large fixed or research and development costs, such as in the pharmaceutical industry, production can be characterized by: a. large variable costs. b. increasing returns to scale. c. negative costs. d. decreasing returns to scale. e. constant returns to scale.

In Figure 5.1, if the economy begins with the initial capital stock at K1, the capital stock will ________ and the economy will ________. a. decrease; grow d. decrease; shrink b. increase; grow e. stay constant; grow c. stay constant; shrink

In Figure 5.3, at K1, the difference between s(bar)Y and d(bar)K is ________ and the difference between Y and s(bar)Y is ________. a. output; investment d. output; consumption b. net investment; consumption e. depreciation; gross investment c. gross investment; consumption

In the Solow model, defining s(bar) as the saving rate, Y(t) as output, and C(t) as consumption, investment I(t) is given by: a. I(t)=(1-s(bar)) d. I(t)=s(bar)Y(t)-C(t) b. I(t)=s(bar)Y(t) e. I(t)=(1-s(bar))Y(t) c. I(t)=(1-s(bar))C(t)

In the Solow model, if a country's saving rate increases, the country: a. moves from a relatively low steady state to one that is lower b. moves from a relatively low steady state to one that is higher c. moves from a relatively high steady state to one that is lower d. stays at a constant high steady state e. stays at a constant low steady state

In the Solow model, net investment is defined as: a. investment plus capital depreciation b. investment minus capital depreciation c. the saving rate minus the depreciation rate d. the saving rate plus the depreciation rate e. None of these answers are correct.

In the labor market depicted in Figure 7.3 (Homework 3/22), a decrease in labor regulation shifts labor: a. supply from LS 2 to LS 1. b. demand from LD 2 to LD 1. c. demand from LD 1 to LD 2. d. supply from LS 1 to LS 2. e. None of these answers is correct.

In the labor market depicted in Figure 7.3, a decrease in labor regulation: a. shifts labor supply from LS2 to LS1 b. shifts labor demand from LD2 to LD1 c. shifts labor demand from LD1 to LD2 d. shifts labor supply from LS1 to LS2 e. None of these answers are correct.

Increasing returns to scale is characterized by: a. constantly declining fixed costs. b. economies of scale; that is, the average cost falls as output rises. c. diseconomies of scale; that is, the average cost is constant as output rises. d. diseconomies of scale; that is, the average cost falls as output rises. e. economies of scale; that is, the average cost rises as output rises.

In Figure 5.1, if the economy begins with the initial capital stock at K3, the capital stock will ________ and the economy will ________.

decrease; shrink

According to the quantity theory of money, the price level is:

determined by the ratio of the effective quantity of money to the volume of goods.

In the Solow model, if we assume that capital depreciation rates are the same across all countries, differences in per capita output can be explained by:

differences in productivity and saving rates.

If the depreciation and saving rates are constant, the economy eventually will reach the steady state in the Solow model because of:

diminishing returns to capital in production.

A production function exhibits constant returns to scale when you:

double each input-you double the output

The rule of 70 states that if yt grows at a rate of g percent per year, then the number of years it takes y, to:

double is approximately equal to 70/g

What is a critical factor that contributed to Reagan's defeat of Carter in the 1980 presidential election?

double-digit inflation

The demand for labor curve is...

downward sloping. derived from the firm's profit maximization problem. equal to the marginal product of labor. derived from the marginal product of labor.

A government that relies on seignorage to finance excess government expenditures is the foundation for the following quote: a. "Velocity growth should be equal to 2 percent in the long run." b. "Inflation is always and everywhere a monetary phenomenon." c. "Velocity is always constant." d. "Inflation is always zero in the long run." e. "Inflation is always and everywhere a fiscal phenomenon."

According to the Keynesian School: a. labor demand is relatively inelastic. b. there may be an increase of nonlabor income relative to labor income. c. employers are not very sensitive to modest minimum wages. d. workers bargaining power has declined over the last several decades. e. all of the answers are true.

Considering Figure 5.6, the transitional dynamics best describe: an increase in the depreciation rate. a positive TFP shock. a decline in the saving rate. a decrease in the capital stock. both a and c.

both a and c

The long-run model determines ________ and ________. a. current output; unemployment d. potential output; potential inflation b. potential output; unemployment e. potential output; long-run inflation c. current output; long-run inflation

The real interest rate is: a. the interest rate not adjusted for inflation b. the "advertised" interest rate c. a description of the return in units of currency d. All of these answers are correct. e. None of these answers are correct.

The steady state is defined as the point where capital accumulation, Δ K t, is equal to: a. the depreciation rate b. the productivity growth rate c. the saving rate d. the population growth rate e. zero

A key reason that unemployment in the United States is so low compared to most of Europe is because of ________ unemployment. a. high structural b. no structural c. low structural d. low frictional e. no cyclical

Over the past 50 years or so, the: a. male employment-population ratio always has been rising. b. female employment-population ratio generally has been falling. c. male employment-population ratio generally has been rising. d. female employment-population ratio generally has been rising. e. None of these answers is correct.

Practically, the real interest rate is equal to: a. a savings account d. the return to stock markets b. the rate of return to long-term bonds e. the return to housing c. the marginal product of capital

Suppose the parameters of the Romer model take the following values: A(bar) = 100, l(bar) = 0.05, z(bar) = 1/100 and L(bar) = 1,000. What is the growth rate of this country's economy? a. 0.02 percent b. 10 percent c. 50 percent d. 0.10 percent e. 40 percent

The Board of Governors of the Federal Reserve a. have staggered 14 year terms. b. have seven members. c. are true for all of the answers. d. were the original policy making body of the FED

The Solow model of economic growth: a. endogenizes labor b. endogenizes investment c. endogenizes physical capital d. exogenizes investment e. exogenizes physical capital

In economics, a nonrival good is one that:

can be consumed by more than one person at a time

In economics, a rival good is one that...

cannot be consumed by more than one person at a time.

In economics, a rival good is one that:

cannot be consumed by more than one person at a time.

A central lesson of the Solow model is that:

capital accumulation cannot serve as the engine of long-run per capita economic growth.

The key insight in the Solow model is that:

capital accumulation contributes to economic growth.

With the production function, Yt = A Kt^1/3 Lt^1/3 if we double ________, we have a constant returns production

capital and labor

In the solow model, If the amount of investment > depreciation. This means that

capital stock will increase until sY = dK Here, the change in capital is equal to 0. The capital stock will stay at this value of capital forever. This is called the steady state

With the production function, Yt = A Kt^1/3 Lt^1/3 if we double ________, we have an increasing returns production.

capital, labor, and the stock of ideas

Cyclical Unemployment

caused by business cycle

Consider an economy where the only consumption good is ice cream.Firms in this economy must:

choose how many workers to hire and ice cream machines to rent

According to the classical dichotomy, in the long run there is...

complete separation of the nominal and real sides of the economy

According to the classical dichotomy, in the long run there is

complete separation of the nominal and real sides of the economy.

According to the classical dichotomy, in the long run there is:

complete separation of the nominal and real sides of the economy.

In the Solow model, it is assumed a(n) ________ fraction of capital depreciates each period.

constant

In the Solow model, it is assumed that a(n) ________ fraction of capital depreciates regardless of the capital stock.

constant

In the Solow model, it is assumed that a(n) ________ fraction of capital depreciates regardless of the capital stock.

constant

The Solow model assumes the saving rate is:

constant

In the Romer model, the production function Yt = At Lyt where At is knowledge and Lyt is the amount of labor in the output sector, exhibits:

constant returns to labor and increasing returns to labor and knowledge.

A production function has inputs X, Y, and Z and a productivity parameter . The A1/3 X1/3 Y1/3 Z1/3 exhibits.

constant returns to scale

The Solow model assumes the saving rate is:

constant.

Recently, the largest share of GDP is

consumption

In the Romer model, what are the two key outputs produced?

consumption good and new ideas

An implication of the Solow model is that once an economy reaches the steady state, per capita:

consumption is constant

The endogenous variables in the Solow model are:

consumption, investment, the capital stock, labor, and output

The endogenous variables in the Solow model are....

consumption, investment, the capital stock, labor, and output.

The endogenous variables in the Solow model are:

consumption, investment, the capital stock, labor, and output.

When a lower-income economy's GDP is able to "catch up" with a higher-income economy's GDP, this behavior is related to an important concept in the study of economic:

convergence

Monetary base includes:

currency and accounts (reserves) Banks hold accounts with the economy's central bank.Banks ensure that they have cash on hand in case of withdrawals.

A key reason that unemployment in the United States is so low compared to most of Europe is because of: a. no cyclical unemployment d. low structural unemployment b. low frictional unemployment e. no structural unemployment c. high structural unemployment

Assume production function is given by Yt = A(bar)Kt^1/3 x L(bar)^2/3. If A(bar) = 2 and L(bar) = 1, and the steady-state capital stock is 8.0, the steady-state level of output is about (see pg. 112 text): a. 8.0 b. 22.6 c. 2.0 d. 4.0 e. 45.4

Using Figure 7.1, identify the year of the peak of the boom: a. 1982 d. 2010 b. 1992 e. 1990 c. 2005

Using the quantity theory of money, we can calculate inflation using ________, under the assumption that ________. a. Pi = % change in M(bar); velocity is constant. b. Pi = % change in Y(bar); velocity is variable c. Pi = % change in M(bar) - % change in Y(bar); percent change in velocity always equals one. d. Pi = 0; velocity is constant e. Pi = % change in M(bar) - % change in Y(bar); velocity is constant

What might be an explanation for the production of open source, free software? a. marginal cost is zero d. moral hazard b. increasing returns e. altruism c. diminishing marginal utility

Compared to the nominal interest rate, the real interest rate is: a. negative d. relatively stable b. always smaller e. relatively volatile c. always greater than zero

Consider Figure 9.1. The dashed line is potential output and the solid line is current output; therefore: a. areas a and b are booms b. area b represents an economic boom, and area a is a recession c. the economy is in neither a recession nor a boom in areas a and b d. area a represents an economic boom, and area b is a recession e. areas a and b are expansions

Consider the Solow model exhibited in Figure 5.4. Which of the following is/are true? i.For any single country, the movement from point a to b is due to an increase in the saving rate, s1>s2. ii. For any single country, the movement from point c to b is due to an increase in capital stock for the saving rate, s2. iii. If s1 and s2 stands for the saving rates in Countries 1 and 2, respectively, Country 2 has a lower saving rate. a. i d. i and ii b. ii e. i, ii, and iii c. iii

Consider the Solow model exhibited in Figure 5.5. Which of the following is/are true? i. If 1 denotes Country 1 and 2 denotes Country 2, Country 1 has a higher saving rate. ii. If 1 denotes Country 1 and 2 denotes Country 2, Country 1 has a lower depreciation rate. iii. If 1 denotes Country 1 and 2 denotes Country 2, Country 2 has a lower steady state. a. i d. ii and iii b. ii e. i, ii, and iii c. iii

In the simple Solow model, we assume: a. the depreciation rate is negative b. TFP equals one c. net investment is always positive d. labor is exogenous e. the saving rate changes frequently

Nonrivalry in the Romer model means that ideas created can: a. benefit only similar economies. b. benefit only a few economies across the world. c. be used only in the economy that devised them. d. benefit virtually all economies across the world. e. None of these answers is correct.

On average, if both rich and poor countries grow at the same rate, this suggests that: a. most countries are contracting b. most countries still are growing c. no countries have reached their steady state d. most countries have reached their steady state e. most countries are unproductive

The proposition that changes in money have no real effect on the economy and affect only prices is called: a. inflation d. the neutrality of money b. the classical dichotomy e. the quantity theory c. the quantity equation

One possible explanation for a high steady-state level of unemployment is: a. the existence of a small number of institutional restrictions b. a shrinking labor force c. perfectly flexible wages d. a high job separation rate e. a rising job finding rate

Which of the following is NOT an example of a short-term macroeconomic shock? a. political unrest b. a change in the tax code c. a drought d. increased military spending e. None of these answers is correct.

Which of the following is a nonrival good? a. a peanut butter sandwich b. orange juice c. a jacket d. All of these answers are correct. e. None of these answers is correct.

Which of the following is an example of an idea? a. new irrigation techniques b. turning sand into computer chips c. the assembly line d. the steam engine e. All of these answers are correct.

With an inflation tax: a. all individuals in an economy feel the pressures equitably. b. there is a redistribution of income from owners of real assets to income earners. c. everybody loses. d. the government has a lot of debt to repay. e. there is a redistribution of income from currency holders to owners of real assets.

An economy's ________ is/are equal to its ________.

expenditure on goods and services; output

The quote "It's a recession when your neighbor loses his job; it's a depression when you lose yours" is attributed to: a. Karl Marx d. Harry S Truman b. Franklin D. Roosevelt e. Alan Greenspan c. John Maynard Keynes

The velocity of money can be calculated from the quantity equation with: a. P(t)Y(t) b. P(t)Y(t)M(t) c. M(t)/P(t)Y(t) d. P(t)Y(t)/M(t) e. M(t)

To minimize what was believed to be a wage-price spiral, the ________ administration ________. a. first Bush; increased taxes b. Reagan; increased corporate income c. Carter; increased interest rates d. Nixon; imposed price controls e. Clinton; released oil from the strategic reserves

If you decide to buy a house with an adjustable-rate mortgage (ARM), you are:

exposing yourself to inflation risk

A U.S. citizen works for a U.S. company in Germany. The income earned by the citizen increases U.S. GDP.

false

Capital per person explains about one-half of the difference in per capita income between the richest and poorest countries.

false

Empirically, money is neutral in the short run as well as the long run

false

Fiscal policy involves changes in the money supply and interest rates to influence the macro-economy.

false

If the marginal product of capital is less than the rental rate of capital, the firm should rent more capital.

false

In the article sent to you by email, the state that is considering raising the minimum wage to $15 per hour by ballot initiative is New York.

false

In the last three hundred years, the standards of living between the richest and poorest countries have converged.

false

The Classical solution for a recession is expansionary fiscal policy.

false

The fraction of people living in poverty has risen since 1960 as the populations of India and China have grown substantially.

false

The standard replication argument implies that Italy can raise its per capita GDP by doubling the amount of capital per person

false

The standard replication argument implies that Italy can raise its per capita GDP by doubling the amount of capital per person.

false

We cannot tell whether the production function Y = K aL 1-a has constant returns to scale, because we do not know the value of a.

false

When price equals marginal cost, economic profits are positive.

false

According to the quantity theory of money, increases in the money supply and in real GDP will cause inflation.

false Page 212-213. After solving the quantity theory of money model, we realize that increases in the money supply and decreases in real GDP will cause inflation.

If the productivity parameter is assumed to equal 1, the production model: A Correctly identifies that countries are richer if they have more capital B Incorrectly predicts that poor countries are substantially richer than they are C Incorrectly predicts that some countries are richer than the United States D All of these choices are correct

D All of these choices are correct

A production function has inputs X,Y, and Z and a productivity parameter . The production function exhibits Y = A^(1/3)X^(1/3)Y^(1/3)Z^(1/3). A Decreasing returns to scale B Increasing returns to scale C Diminishing returns to scale D Constant returns to scale

D Constant returns to scale

If MPK > r, the firm: A Should hire more labor B Should hire more capital until MPK = 0 C Should get rid of some capital until MPK = r D Should hire more capital until MPK = r E Has the optimal amount of capital

D Should hire more capital until MPK = r

In the production model from the text, which of the following is NOT an exogenous variable or a parameter? A The supply of capital B The supply of labor C The productivity of parameter D The amount of capital

D The amount of capital

Give 3 useful mathematical properties of growth rates...

Growth rates obey mathematical operations that are a level simpler than the operation on the original variable Variables divided => growth rates subtracted Variables multiplied => growth rates added Variable taken to a power number => growth rate multiplied by that number

In the steady state, investment equals . . .

Depreciation. sY* = dK*

Why does the Solow model fail to explain economic growth in the long run?

Diminishing returns to capital and constant depreciation rate.

Why does the Solow model lead to the principle of transition dynamics, and why is it useful?

Diminishing returns to capital and constant depreciation rate. The more capital you have, the more capital you have wearing out, and the harder it is to build extra units of capital.

How do you find per capita GDP?

Divide Y by L. y = Abark^(1/3)

To turn the Cobb-Douglas Production Function into focusing on output per person, what must be done?

Divide output by the number of workers

Macroeconomists have a general approach to study questions of interest, explain what these are...

Document the facts. Develop a model. Compare predictions of the model with original facts. Use the model to make other predictions that will eventually be tested.

The growth rate of per capita GDP in the Romer model depends on the number of workers engaged in research. However, the country of Luxemburg, which has far fewer researchers than the U.S., grows at a rate faster than the U.S. and has a higher per capita GDP. How can the Romer model explain this difference in growth rates?

Due to the nonrivalry of ideas, the economy of Luxemburg grows because the model is based on ideas created throughout the world not just within that country. FEEDBACK: Pages 151-152. All countries benefit from all the ideas created in the world not just those created within their own borders because of the existence of international trade, multinational corporations, licensing agreements, international patent filings, the open flow of information, and migration.

__________ are parameters to the model and generally are fixed over time, while _________ are the outcomes of the model.

Exogenous variables; endogenous variables

____ 1. Macroeconomics is the study of an individual market

____ 4. An economic model is an exact replica of the macroeconomy.

The Solow model is a static model and thus can only tell us the levels of our endogenous variables in steady state. T/F

False

We cannot tell whether the production function Y=K^(a)L^(1−a) has constant returns to scale because we do not know the value of a.

False

Patents are unambiguously beneficial to society because they create profits for firms, which generate incentives to produce new ideas.

False FEEDBACK: Page 144. Patents also distort the economy by generating welfare loss.

The production function Y = Abar^1/3Kbar^1/3Lbar^1/3 exhibits decreasing returns in K and L but increasing returns to A, K, and L together.

False FEEDBACK: Pages 141-143. Scaling K and L by 2 will result in decreasing returns to K and L, but doubling A, K, and L will only double output (constant returns to A, K, and L).

d. should hire more capital until MPK = r.

If MPK > r, the firm: a. should hire more labor. b. should hire more capital until MPK = 0. c. should get rid of some capital until MPK =r. d. should hire more capital until MPK = r. e.has the optimal amount of capital

If Samantha quits her job voluntarily and actively searches for other work, then she is considered: A) structurally unemployed. B) frictionally unemployed. C) cyclically unemployed. D) not to be unemployed.

a. the same steady-state level of output as it would have before the disaster.

If a natural disaster destroys a large portion of a country's capital stock but the saving and depreciation rates are unchanged, the Solow model predicts that the economy will grow and eventually reach: a. the same steady-state level of output as it would have before the disaster. b. a higher steady-state level of output than it would have before the disaster. c. a lower steady-state level of output than it would have before the disaster. d. Not enough information is given. e. None of these answers is correct.

If current output is $21.92 trillion and potential output is $23 trillion, then the economy is in a and the GDP gap is . (a) expansion; 4.7% (b) expansion; 4.93% (c) recession; -4.93% (d) expansion; -4.7% (e) recession; -4.7%

GDP does include...

Only goods and services that are transacted through markets are included in GDP.

What are the four equations of the Romer model?

Output production function, idea production function, resource constraint, allocation of labor.

What is constant in the steady state?

Output, capital, output per person, consumption per person.

Money that has no intrinsic value except as money is called _____________ money.

Fiat

International comparisons of GDP involve two conversions. What are these?

First, we need exchange rates to convert the measures into a common currency. Second, just as we need to use common prices to measure real GDP over time, we also need to use common prices to compare real GDP across countries.

3 things about The employment-population ratio...

Fraction of the civilian population over the age of 16 that is working Has been increasing over time (US) Decreases during recessions

Frictional unemployment is the unemployment that results from (a) workers changing jobs in a dynamic economy (b) workers losing their jobs during a recession (c) prevailing labor market institutions (d) workers losing their jobs during seasonal changes

natural rate of unemployment

Frictional+structural

Define and explain The government budget constraint...

G = T + ∆B + ∆M Where: G = Govt funds T = Tax revenue ∆B = Borrowing ∆M = Changes in the stock of money G also = uses T + ∆B + ∆M also = Sources of funds

By how much does GDP change between 2010 and 2011 in the following scenario? In 2010, a rich woman has a chef and pays him $50,000 to cook for her. In 2010, she marries the chef and he continues to cook.

GDP falls by $50,000.

The crux of the solow growth model is that...

It Augments the production model with capital accumulation Capital stock is no longer exogenous. Capital stock is now endogenized The accumulation of capital is a possible engine of long-run economic growth.

In the solow model, Can growth in the labor force lead to overall economic growth?

It can in the aggregate It cannot in output per person

Why is national defense nonrivalrous?

It costs roughly as much to defend 100 people from invasion as to defend 100 million people from invasion.

Balloon example for monetary vs. fiscal policy

Outside of balloon represents Potential GDP. Inside balloon is fiscal policy. Fed is outside, Fed pumps air in and out of balloon. Pumping air in is expansionary monetary policy, pumping out is extractionary.

...

Lecture 3 We cannot tell whether the production function y = K^(a)L^(1-a) has constant returns to scale because we do not know the value of a. a.true b.false .

...

Lecture 9 Suppose the Federal Reserve decreases interest rates from 4 percent to 3 percent, which leads to an increase in short-run output of 1.5 percent. If there are no other shocks to the economy, and the resulting change in inflation is +0.375 percent, what is the value of the parameter V? a.4 b.0.25 c.1.5 d.0.66

The wholesale price of one pound of coffee was 8.25 cents in 1900 and $1.50 in 2015. If the CPI was 3.43 for 1900 and 100 for 2015, coffee was

Less expensive in 2015 compared to 1900

Define the natural rate of unemployment.

Lowest rate of unemployment that can be sustatined in the long run. Structural and frictional

To recap, in the Solow Model, what is the labour force equation?

Lt = Lbar

What is the Solow labor force equation?

Lt = Lbar

What is the resource constraint in the Romer model?

Lyt + Lat = Lbar

In the Romer model, explain what is meant by the resource constraint

Lyt + Lat = Lbar That is, the number of workers producing output and the number of workers producing ideas (engaged in research) add up to the total population L, which we take to be a constant parameter.

Solve the Romer model for labor.

Lyt = (1 - l)Lbar

The measure of money that includes demand deposits and currency only is called

M1.

How do you maximize profit in the production function?

MPK = r and MPL = w Max Pi = AbarK^(1/2)L^(1/2) - rK - wL

Define and explain the quantity theory of money....

MV = PY Where.. M = money supply V = Velocity of money (The average number of times per year that each piece of paper currency is used in a transaction) P = Price level Y = Real GDP It connects Money and inflation and shows how The amount of money used in purchases is equal to nominal GDP

What does growth accounting endeavor to do?

Measure what factors, and in what proportions, affect overall economic growth.

Models do what 3 things...

Models simplify the complicated real world into its most relevant elements. A model is useful if it has good predictive power. Economic models often involve systems of multiple equations.

The growth rate of output in the Romer model is zlL. Why does each of these parameters belong in the solution?

More efficient idea creation, a larger fraction of workers searching for ideas, or more workers in the first place—all of these would increase the economy's overall growth rate.

What is the miracle of long-term economic growth?

Most of the things people want are a little bit less scarce each year.

Total factor productivity is also referred to as . . .

Multi-factor productivity or the Solow residual.

To minimize what was believed to be a wage-price spiral, the ________ administration ________

Nixon; imposed price controls

What is nonrivalry?

Nonrivalry exists when one person's use of a good leaves just as much of that good for someone else. A nonrivalrous good can't be "used up."

Explain the link between Increasing returns to scale and non-rivalry

Nonrivalry: Objects are rivalrous, One person's use reduces the usefulness to someone else. BUT Ideas are nonrivalrous, National defense is nonrivalrous. This means that with Increasing returns to scale, once one person pays the cost of creating it, many people can use it without paying any extra cost. As the scale grows larger, the average cost of producing the nonrivalrous good always falls.

The influences of institutions on economic performance can be easily contrasted using:

North and South Korea

The Romer model divides the world into what 2 categories...

Objects - capital and labor from the Solow model - these are finite Ideas - items used in making objects - these are virtually infinite

The production function of the Romer model has increasing returns to scale in . . .

Objects alone.

In Romer's influential paper he divided the economic world into . . .

Objects and ideas.

What is the rivalry of objects and ideas?

Objects are rivalrous One person's use reduces the usefulness to someone else Ideas are nonrivalrous One person's use does not reduce the usefulness to someone

Ideas vs. Objects

Objects: physical things, constant returns to scale, rival. Ideas: inspiration, don't have constant returns to scale, in the public goods sector, nonrival, public goods.

How does nonrivalry lead to increasing returns?

Once one person pays the cost of creating the good, many people can use it without paying any extra cost. As the scale grows larger, the average cost of producing the nonrivalrous good always falls.

e. None of these answers is correct.

One consequence of wage rigidity is: a. lower rates of unemployment. b. less labor market volatility. c. labor market stability. d. a lower unemployment rate. e. None of these answers is correct.

One possible explanation for a high steady-state level of unemployment is (a) a shrinking labor force (b) a high job separation rate (c) a rising job finding rate (d) perfectly flexible wages

What Is Included in GDP and What Is Not?

Only considers final goods and services Intermediate goods are not included in GDP calculations For example, if Alcoa sells aluminium to Ford to make a Focus ST The sale of the car is included in GDP, but not the sale of the aluminium

The present value formula for a single amount is:

PV = FV x [ 1 ÷ (1+i)ⁿ]

What is total revenue in the production function?

Which of the following will have a real effect on the United States economy?

Page 215-216. Changes in the money supply will have no real effect on the economy unless the relative price of goods is changed. None of the three changes alter relative prices.

What is the idea of Shoe leather costs of inflation?

People want to hold less money when inflation is high.

An increase in ________ leads to a higher steady-state level of output per worker, and a decline in the ________ leads to a lower steady-state level of output per worker.

productivity; saving rate

What is the rule for capital hiring in the production model?

r = (1/3)(Y/K) r* = (1/3)Abar(Lbar/Kbar)^(2/3)

What is total cost in the production function?

rK + wL

Which of the following is/are left out of the Solow model? productivity consumption real interest rates the saving rate depreciation

real interest rates

Negative inflationary surprises lead to a(n)

redistribution of wealth from borrowers to lenders.

According to the quantity equation, the cure for hyperinflation is...

reducing money growth.

The cure for hyperinflation is

reducing money growth.

Compared to the nominal interest rate, the real interest rate is:

relatively stable.

If MPL < w, the firm:

should fire some labor until MPL =w

If MPK > r, the firm

should hire more capital until MPK = r

Under the classical dichotomy, which of the following does not determine real GDP in the long run?

the aggregate price level Pages 211-212. In the long run, real GDP is only determined by real considerations and not on variables, such as money or the aggregate price level.

Despite the costs associated with economic growth, most believe:

the benefits far outweigh the costs

When calculating fixed retirement payments, it is important not to forget

the decline in the payment's value due to inflation.

In the Solow model, the parameter denotes ________ and is ________.

the depreciation rate; less than one

If net investment is negative:

the economy is above its steady state and growth of output is negative. Negative net investment implies depreciation is greater than investment. Thus, the economy has a capital stock that is decreasing because it is above steady state.

The level of consumption is largest when:

the economy is above its steady state.

The quantity theory states that the nominal GDP is equal to

the effective amount of money used in purchases.

Starting from steady state, a permanent increase in the rate of depreciation in the Solow model causes

the growth rate of output to fall temporarily and the level of GDP to fall permanently.An increase in the depreciation rate causes the depreciation curve to pivot upward, resulting in a new lower steady state. Thus, the growth rate of output is rapidly negative at first and converges to zero as it approaches steady state.

An economy starts in steady state. A war causes a massive destruction of the capital stock. This shock will cause

the growth rate of output to rise initially as the economy begins to converge to the old steady state.

The Great Inflation of the 1970s was partially caused by:

the inflation tax used to finance the Vietnam War. increases in oil prices. a money supply that was growing too quickly. Pages 225. Both "increases in oil prices" and "a money supply that was growing too quickly" are correct. Increase in oil prices spurred inflation while the Federal Reserve made mistakes in running a monetary policy that was too loose.

If long-run real GDP growth is determined by real changes in the economy, the quantity theory of money implies that changes in

the money growth rate lead one-for-one to changes in the inflation rate in the long run.

In the long run, the key determinant of the price level is

the money supply Pages 212-213. The price level is determined by the money supply, while the inflation rate is pinned down by the growth rate in the money supply.

The Solow model assumes the:

the number of workers is constant

Macroeconomics is the study of ________ while microeconomics studies ________.

the overall performance of an economy; an individual market

When discussing inflation, we generally speak of it in terms of

the percent change in the consumer price index.

Which of the following is included in TFP?

the quality of labor

If the inflation rate is larger than the nominal interest rate

the real interest rate is negative.

If the inflation rate is larger than the nominal interest rate:

the real interest rate is negative.

the same steady-state level of output as it would have before the disaster

If the real interest rate is 3 percent and the nominal interest rate is 1 percent, then the economy is experiencing deflation according to the Fisher equation.

true

In 1990, a country's per capita income was 1,000. By the year 2000, it was 1,650. The average annual growth rate was approximately 0.05.

true

In a Cobb-Douglas production function, the factor share of income going to each input is equal to the exponent on the input in the production function.

true

In a liquidity trap, expansionary monetary policy is not effective.

true

In the Solow model, if gross investment is greater than capital depreciation, the economy accumulates new capital.

true

In the Solow model, it is assumed that a constant fraction of capital depreciates in each period.

true

Keynesian economists are "demand side" focused while classical economists focus on "supply side."

true

Keynesian economists believed velocity to be unstable.

true

Per capita GDP can grow at a negative rate.

true

Keynesian (original school) economists argue

velocity is unstable. monetary policy can influence real output in the long-run. monetary policy is a weak policy tool. *all of the answers are true.

What is the rule for labor hiring in the production model?

w = (2/3)(Y/L) w* = (2/3)Abar(Kbar/Lbar)^(1/3)

Suppose the payments to capital and labor are ( w*L*) /Y* = 2/3 and ( r*K*) /Y* = 2/3, respectively. One implication of this result is...

w*L* + r*K* > Y*

Present discounted value

where fv = future value i = interest rate t = year

For which of the following does the Solow model provide adequate explanations?

why saving rates differ across countries the cause of productivity differences across countries why population growth rates differ across countries what causes long-term economic growth

Suppose k, l, and A grow at constant rates given by gk , gl , and g A. What is the growth rate of y if

y = Aka l^ 1 -a ,a > 0?

What is the solution for output per person?

y* = (Y*/L*) = Abar^(3/2)(s/d)^(1/2)

growth rate of knowledge

zlL

Using the Solow model, if, in time t = 50, the capital stock is K50 = 150, investment is I50 = 15, and d=0 is the depreciation rate, capital accumulation from period 50 to 51 is:

ΔK51 = 0.

Using the Solow model, if, in time t = 50, the capital stock is K50 = 150, investment is I50 = 15, and is the depreciation rate, capital accumulation from period 50 to 51 is:

ΔK51 = 15

What is the Solow change in capital stock equation?

ΔKt+1 = Kt+1 - Kt Thus, ΔKt+1 = (Kt + It - dKt) - Kt ΔKt+1 = It - dKt

Change in capital stock defined as:

δKt+1 = Kt+1 - Kt and thus (from the other slide in deez slides referring Goods invested for the future determine the accumulation of capital.) δKt+1 = It - (dbar x Kt)

The Romer model produces long-run growth, explain why this is so and how it differs from the solow model

∆At+1 = zbarAtLat Does not have diminishing returns to ideas because labour and ideas are nonrivalrous and have increasing returns together which in turn means Returns to ideas are unrestricted. In the Solow model however, capital has diminishing returns and Eventually, capital and income stop growing

In the Romer model, explain algebraically why The growth rate of knowledge is constant

∆At+1/At = zbarLat = zbarlbarLbar

If the real GDP growth is 6 percent per year, the money growth rate is 4 percent, and velocity isconstant, using the quantity theory, the inflation rate is:

−2 percent

Empirically, money is neutral in the short run as well as the long run.

false Page 215-216. The neutrality of money fails in the short run, because nominal prices do not respond immediately to changes in the money supply.

Price differences over time are actually larger than the raw difference in prices between any two years, because inflation has eroded the value of the dollar over time.

false Pages 208-209. Because inflation has eroded the value of the dollar, price differences between a good purchased in 1950 and today are actually smaller than they seem after adjusting.

Define and explain the Fisher equation...

i = R + π Where: i = nominal interest rate R = Real interest rate π = inflation rate The nominal interest rate is generally high when inflation is high

Consider the Solow model exhibited in Figure 5.4. Which of the following is/are true? i. For any single country, the movement from point a to b is due to an increase in the saving rate, s1 > s2.ii. For any single country, the movement from point c to b is due to an increase in capital stock for the saving rate, s2.iii. If s1 and s2 stand for the saving rates in Countries 1 and 2, respectively, Country 2 has a lower saving rate.

i,i,iii

Given a discounted value equation, $386 = $1, 000/(1.1)10, this means you are...

indifferent between receiving $386 today and $1,000 in 10 years.

The parameter(s) in the Romer model is/are the:

initial stock of ideas, the population, the fraction of population in the ideas sector, and the ideas efficiency parameter.

In the Solow model, net investment is defined as:

investment - capital depreciation

In the Solow model, net investment is defined as:

investment minus capital depreciation.

In the Romer model, with decreasing returns to the knowledge sector, the number of researchers is...

irrelevant to long-term per capita income

In the Solow model, if capital is in the steady state, output:

is also in the steady state.

A government is more likely to utilize the inflation tax if

it is running a budget deficit. lenders worry that the government will not pay back its debts. politicians will not raise taxes, because they cannot be reelected if they do. Pages 221-222. The inflation tax is likely to be used as a last resort. If deficits are high and additional borrowing and taxing are impossible, the inflation tax will be used to raise revenue.

The difference between economic profits and normal profits is that:

normal profits are earnings based on the normal competitive return to one's own labor; economic profits are the above-normal returns associated with prices that exceed competitive prices

In the Romer model, if an economy's population increases:

output growth accelerates

The Cobb-Douglas production describes how ________ can be combined to generate output.

particular amounts of capital and labor

By purchasing a fixed-rate 30-year mortgage, inflation risk is:

passed from the borrower to the lender

Nonrivalry in the knowledge sector means that:

per capita income depends on the total stock of ideas

If NGDP is nominal GDP and P is the price level, what can be used to calculate the growth of the real GDP?

percent change in NGDP − percent change in P

The Solow model of economic growth endogenizes...

physical capital.

Okun's Law

presents the relationship between cyclical unemployment and short-run output. u-u(bar)=-(1/2)Y(~bar)(t) first u represents current unemployment rate, second u represents the natural rate of unemployment and Y represents short-run output

Structural unemployment is the unemployment that results from...

prevailing labor market institutions.

Wage rigidity prevents...

prevents the labor market from realizing equilibrium.

The right to seignorage is the right to

print money.

According to the government's budget constraint, if the government spends more than it generates in taxes, it can raise revenues by

printing money

The sources of Investment (I) include

private savings (S) foreign savings (M-X) government savings (T-G) *all of the answers.

In the Solow model, the ________ plays a ________ role than it does in the standard production function model.

productivity parameter; larger

Which of the following is an exogenous variable in the Solow model?

productivity, depreciation rate, the saving rate, initial capital stock

In the Solow model, the steady-state level of output per worker is a function of:

productivity, the depreciation rate, and the saving rate.

Which of the following is an exogenous variable in the Solow model?

productivity, the depreciation rate, the saving rate, the initial capital stock

In the United States, money is backed by

no physical commodity.

In the quantity equation, the value PtYt is:

nominal GDP

When comparing shares of consumption in GDP it is best to use ( ___ ) variables. When comparing real rates of economic growth it is best to use ( ___ ) variables.

nominal; chain-weighted

What are the five unknowns/endogenous variables in the production model?

Y, K, L, r, w

Solve for the change in the stock of knowledge in the Romer model.

zlL.

What is the idea production function in the Romer model?

ΔAt+1 = zAtLat

Using the Solow model, if, in time t = 0, the initial capital stock is K0 = 100, investment is I0 = 25, and .1 is the depreciation rate, capital accumulation from period 0 to period 1 is:

ΔK1 = 15.

True

(TRUE/FALSE) Recessions are worse when wages are sticky

False

(TRUE/FALSE) The job separation rate generally rises during recessions.

True

(TRUE/FALSE) Unemployment due to institutional frictions is called structural unemployment

False

(TRUE/FALSE) Unemployment generally rises during economic booms.

A Reduction in Labor Demand with Wage Rigidity could be represented graphically like...

(but also imagine another demand curve above the one shown with the same gradient but intersecting the supply curve at Ls)

referring to money aggregates as defined by the bank of England, what is M0 ?

+Currency + banks operational balances at the BoE +Banks' retail deposits +Building societies' shares and deposits +Other interest bearing bank deposits

What is the equation for demand = supply for labor in the production model?

L = Lbar

What is the allocation of labor in the Romer model?

Lat = lLbar

Using the labor market, we would see a decline in the supply of labor, which would increase wages/salaries for those workers still in the market, as the number of workers declined.

Leading up to the 2010 midterm elections, there was lively debate on whether the Bush tax cuts, enacted in 2003, should be allowed to expire for families with annual incomes over $250,000. What would be the impact of allowing income taxes on these families to rise on their incomes and the number of labor participants?

...

Lecture 10 All economies are open. A recession in Europe decreases demand for U.S. goods. The U.S. economy will have a.initially higher short-run output and inflation, but lower short-run output and inflation in the long run. b.initially lower short-run output and inflation, but higher short-run output and inflation in the long run. c.initially lower inflation and short-run output, but in the long run will have the same long-run steady state as before the shock. d.initially higher inflation and short-run output, but in the long run will have the same long-run steady state as before the shock.

...

Lecture 3 If the marginal product of capital is less than the rental rate of capital, the firm should rent more capital. a.true b.false

Output per capita and output per worker are

equal in the production model, but output per capita is smaller in general.

Why is growth accounting useful?

Growth accounting taught economists that ideas were much more important than many wanted to believe, which eventually encouraged economists to build good models of where ideas come from.

The key difference between the Solow model and the production model is that the:

Solow model endogenizes the process of capital accumulation.

The firm's profit maximization problem is:

max pie + F(K, L) - rK - wL {K, L}

The solution to the firm's profit maximization is...

MPL = w and MPK = r

13. The statistic used by economists to measure the value of economic output is: a. the unemployment rate d. the GDP deflator b. GDP e. the federal funds rate c. the CPI

Solve for At in the Romer model.

At = A0(1 + g)^t

In 1979, in the face of rising competition in the fast food hamburger market, McDonald's reduced theprice of its cheeseburger to $0.43. If the CPI in 1979 was 37.2 and the CPI in 2005 was 100, what is the price of a 1979 cheeseburger in 2005 dollars?

$1.16

Suppose the government decides to spend $500 million on infrastructure improvement projects. Part of the financing will be from additional borrowing in the amount of $200 million. An increase in taxes will bring an extra $200 million. If the government decides to print new money to finance the rest, how much will the seignorage be?

$100 million Page 221. Apply equation 8.7, where G = $500 million, T = $200 million, = ΔB = $200 million and is the unknown variable. Solving from yields = $100 million.

Suppose that nominal GDP is $5,000 and the velocity of money is equal to 5. According to the quantity theory of money, what is the amount of money in circulation?

$1000 Page 211. Apply equation 8.1, where Mt is the unknown variable, Vt = 5, and PtYt = $5,000. Solving for Mt yields Mt = $1,000.

Suppose you put $100 dollars in the bank on January 1, 2013. If the annual nominal interest rate is 5percent and the inflation rate is 2 percent, you will be able to buy ________ worth of goods on January 1, 2014.

$103

If nominal GDP grew by 7% in year 2 relative to year 1, the price level increased by 2% during the same period and the real GDP in year 1 was $1,000, what was real GDP in year 2?

$1050 Real GDP = Nominal GDP / Price level, therefore % Change in Real GDP = %Change in Nominal GDP - % Change in Price level = 7% - 2% = 5% If real GDP in year 2 be Y, then (Y - $1,000) / $1,000 = 0.05 Y - $1,000 = $50 Y = $1,050

After graduating college, you start a job making $40,000. Your earnings grow at a constant growth rate of 3 percent per year. When you retire 40 years later, you are earning approximately:

$130,000 40000(1.03^40)

A construction company produces a $200,000 house using $50,000 worth of wood and steel in addition to $50,000 of labor hours. The value added by the construction company is

$150,000

What was the United States Real GDP in Q2 2016?

$16.575 trillion.

What was the United States Nominal GDP in Q2 2016?

$18.43 trillion.

Assume that Mexico's average annual per capita GDP growth rate is 3 percent per year, while Argentina's is 2.5 percent. Next, assume that both countries began with an initial per capita GDP of $1,000 in 1965. By 2015, per capita GDP would have been ________ in Mexico and ________ in Argentina

$4,384; $3,437

Which of the following lists the four steps we use to study macroeconomic behaviour in the correct order?

(1) document the facts; (2) develop a model; (3) compare the predictions of the model to the original facts; and (4) use the model to make other predictions that may eventually be tested.

list the four steps we use to study macroeconomic behavior in the correct order?

(1) document the facts; (2) develop a model; (3) compare the predictions of the model to the original facts; and (4) use the model to make other predictions that may eventually be tested

If Pt is the price level in time, t, inflation is calculated as

(Pt+1-Pt )/Pt .

False

(TRUE/FALSE) An increase in labor market tightness is associated with an increase in the duration of unemployment, all else constant

-6.5 percent Real GDP 2014 using 2014 prices = 2,000x6 + 10x1,000=22,000Real GDP 2015 using 2014 prices = 1,000x6 + 12x1,000=18,000Percentage change = (18,000-22,000)/22,000= -18%Real GDP 2014 using 2015 prices = 2,000x5 + 10x1,000=20,000Real GDP 2015 using 2015 prices = 1,000x5 + 12x1,000=17,000Percentage change = (17,000-20,000)/20,000= -15%Percentage change in real GDP in chained prices benchmarked to 2015 is the average of the two growth rates = (-18 -15)/2 = - 16.5%Nominal GDP 2014 = 2,000x6 + 10x1,000=22,000Nominal GDP 2015 = 1,000x5 + 12x1,000=17,000Percentage change in nominal GDP = (17,000-22,000)/22,000 = -22.7%Percentage change in price level (inflation) = -22.7%+16.5%=-6.2%

Strengths of Solow Model

-provides good example of long term growth -solid model -widespread framework for most macroeconomic models -shows a clear mathematical pathway for a country to become wealthy and prosperous

Weaknesses of Solow Model

-wide differences in capital stock across countries -doesn't explain wide ranges of standard of living -TFP taken in as a residual -doesn't embed a theory of long term growth (explains part of why a country grows but not all)

Suppose India has a per capita GDP that is .074 times the United States GDP. It has a capital-per-person ratio that is .035 times that of the United States. Compared to the United States, the implied value of total factor productivity for India is approximately

.23

If the productivity parameter is assumed to equal 1, the production model

.a correctly identifies that countries are richer if they have more capital. b. incorrectly predicts that poor countries are substantially richer than they are. c. incorrectly predicts that some countries are richer than the United States. d. All of these choices are correct

What is the marginal product of capital (MPK) for the production function Y=AK1/2L1/2 ?

1/2 ak1/2 L1/2 Over K

According to figure 3.7, the fastest growing country during 1960-2014 had a level of per capita GDP approximately equal to _____of the U.S. level:

1/4

In 1994 your parents made an investment of $4,000. By 2015 the investment grew to $32,000. Assuming a constant rate of growth, what was the average annual growth rate of this investment?

10 percent The data above are plotted using a ratio scale. Since this is a straight line we can conclude that the growth rate is constant. We see that the investment doubles every 7 years (i.e. for 1994 - 2001 the investment grew from $4,000 to $8,000; or use formula 3.9 to verify). Therefore, we can estimate the growth rate using the rule of 70: 70/7 = 10%

A Romer economy starts off with an initial stock of ideas equal to 100. The total population in the economy is 60, two of the workers are employed in the research sector, and the productivity parameter of the research sector is equal to 0.01. The stock of ideas in period 10 is equal to:

100(1 + 0.01x2)^10 FEEDBACK: Pages 148-149. The stock of ideas in period t is equal to At = Abar0(1+gbar)^t and gbar = zbarℓbarLbar, where zbar is the productivity parameter of the research sector (0.01), ℓbar is the fraction of the population that works in research, and Lbar is the total population in the economy.

Using the quantity equation, if, Mtt = $1,000, Ptt = 1.1, and Ytt = 100,000, then the velocity of money is:

110

Using the quantity equation, if Mt=$1,000, Pt=1.1, and Yt=100,000, then the velocity of money is

110.

in a production model where the production function is Y=AK1/3L2/3 the equilibrium wage rate is equal to 30/27, labor supply is 27 workers and the productivity parameter is equal to 1. what is the equilibrium level of capital?

125 The equilibrium wage rate is given by and is equal to in this case. We know that in equilibrium, quantity of labor supplied is equal to the quantity of labor demanded, so L* = 27. Set the equilibrium wage rate equal to the analytical solution for w* in Table 4.2 and solve for K;K = 125

What is the average annual growth rate in the United States?

2% per year.

According to the International Monetary Fund, income per capita in Bhutan in 2015 was Int$8,201 while income per capita in Chad in the same year was Int$1,214. If Bhutan's investment rate is 40% and Chad's investment rate is 10%, what is the productivity ratio mc012-1.jpg? Round to the nearest tenth. Assume both countries are in their steady states.

2.3

Assume a production function is given by Y=AK^1/3L^2/3. If A=L=1, the depreciation rate is d=0.05, and the saving rate is s=0.1 the steady-state level of capital is about:

2.8.

If per capita GDP in 2015 was $1,000 and in 2016 was $1,200, the growth rate of per capita GDP was:

20 percent 1000-1200=200 200/1000=20 percent

If the population of Romania was about 20.3 million in 1970 and the average population growth rate is 0.2 percent, then Romania's population would have been about ________ million in 2010.

22.0 20.3(1.002)^40=22.0

Consider an economy characterized by the production function Y= AK 1/2L1/2 where the productivity parameter is equal to 1.2. How many units of output can be produced with 25 units of capital and 64 workers?

48 A production function is a mathematical representation of the relationship between inputs and output, i.e. how much output can be produced with any input combination. Replacing , K = 25, and L = 64 yields Y = 48.

In the Solow model, there are 5 equations and 5 unknowns. Tell me what these are?

5 unknowns: Y K L C I 5 equations: Production function Capital accumulation Labour force Resource constraint Allocation of resources

A Romer economy starts off with an initial stock of ideas equal to 100. The growth rate of ideas is 5% and the share of the population engaged in research is 5%. What is the growth rate of output per capita? Round to the nearest decimal.

5% FEEDBACK: Pages 149-150; Figure 6.2. Output per capita grows at a constant rate. Therefore, we can calculate the level of income per capita in any two periods and find the corresponding growth rate. For example, y1 = 100x(1 - 0.05)x(1 +0.05) = 99.8 and y2 = 100x(1 - 0.05)x(1 + 0.05)^2 = 104.7. The growth rate of per capita output in period 2 is then (104.7-99.8)/99.8=5%.

Suppose the parameters of the Romer model take the following values: Abar0 = 100, ℓbar = 0.05, zbar = 1/100, and Lbar = 1,000. What is the growth rate of this country's economy?

50 percent

You are the head of the central bank and you want to maintain 2 percent long-run inflation, using the quantity theory of money. If the real GDP growth is 4 percent and velocity is constant, you suggest a

6 percent money supply growth.

Suppose x grows at a rate of gx 3 percent and y grows at a rate of gy 3 percent. If z x y, then z grows at ________ percent; if z x/y, z grows at ________ percent

6;0

In the year 2014 the five richest countries had a per capita GDP ________ times higher than the five poorest countries. Differences in capital per worker explain about ________ percent of this difference, with total factor productivity making up about ________ percent of this difference

70; 5; 14

Assume a production function is given by Y=AK^1/3L^2/3. If and L=1, the depreciation rate is d=0.05, and the saving rate is s=0.1, the steady-state level of capital is about:

8.0

The price controls imposed by the Nixon administration lasted for

90 days.

10. The National Income and Product Accounts provides a system for: a. aggregating the production of all goods and services into a single measure of economic activity b. aggregating the production of all goods into a single measure of economic activity c. aggregating the production of all services into a single measure of economic activity d. aggregating the production of most goods and services into a single measure of economic activity e. aggregating the production of all goods and services into two measures of economic activity

11. The difference between economic profits and normal profits is that: a. normal profits are earnings based on the normal competitive return to one's own labor; economic profits are the above-normal returns associated with prices that exceed competitive prices b. economic profits are earnings based on the normal competitive return to one's own labor; normal profits are the above-normal returns associated with prices that exceed competitive prices c. normal profits are earnings based on the normal competitive return to one's own labor; economic profits are the above-normal returns associated with prices that exceed monopolistic prices d. economic profits are earnings based on the noncompetitive return to one's own labor; normal profits are the above-normal returns associated with prices that exceed competitive prices e. None of these answers are correct.

12. Goods that are produced in a different year than they are sold are called: a. inventory d. a loss b. output adjustment e. net national product c. capital depreciation

17. Using the expenditure approach, consumption expenditures include household purchases of: a. durable and nondurable goods and services b. durable and nondurable goods c. durable and nondurable goods and taxes d. durable and nondurable goods and residences e. nondurable goods

2. Which of the following does macroeconomics endeavor to answer? i. What role does the government play in recessions and booms and in determining the rate of inflation? ii. What causes an increase in the price of Exxon stock? iii. How does a dairy farmer react to rising milk prices? a. i only d. i, ii, and iii b. ii only e. ii and iii c. iii only

7. When we look at the ________ we are concerned with the ________. a. short run; causes of economic fluctuations b. long run; causes of economic fluctuations c. short run; determinants of economic growth d. long run; causes of inflation e. long run; money supply

Economic growth is defined as: a. the percent change in per capita income, or GDP b. the percent change in prices, or GDP c. the decline in the unemployment rate d. the difference between the nominal and real GDP e. changes in technology

English philosopher Thomas Hobbes is notable for observing that life was ________ for thousands of years. a. nasty, brutish, and short d. halcyon, fulsome, but short b. just like the legend of King Arthur e. comfortable and prosperous c. great, if you were a king

In the Cobb-Douglas production function Y = K^(a)L^(1−a), if a = 1/4, then: A Capital's share of GDP is one-fourth B Labor's share of GDP is half C Capital's share of GDP is three-fourths D Labor's share of income is one-fourth E Capital's share of GDP is four

A Capital's share of GDP is one-fourth

Table 4.1: Production Model's Prediction for Per Capita GDP (US = 1) Consider Table 4.1, which compares the model to actual statistical data on per capita GDP. You observe the model: A Consistently underestimates the level of per capita GDP B Consistently overestimates the level of per capita GDP C Does a really good job of estimating the level of per capita GDP D Clearly contains all factors that affect per capita GDP

A Consistently underestimates the level of per capita GDP

The influences of institutions on economic performance can be easily contrasted using: A North and South Korea B France and Germany C Iowa and Illinois D Uzbekistan and the U.K. E Earth and Mars

A North and South Korea

What is a ratio scale?

A Plot where equally spaced tick marks on the vertical axis are labeled consecutively with numbers that exhibit a constant ratio When plotted on a ratio scale, a variable that grows at a constant rate will be a straight line

d. the labor supply curve shifting right.

A decrease in the income tax will result in: a. the labor demand curve shifting right. b. the labor demand curve shifting left. c. the labor supply curve shifting left and the labor demand curve shifting right. d. the labor supply curve shifting right. e. neither the labor supply nor the demand curve shifting.

The quantity theory of money says that a doubling of the growth rate in the money supply will, in the long run, lead to

A doubling of inflation

In perfect competition the allocation of resources is pareto efficient, but under increasing returns to scale, this poses a problem due to the fact that...

A firm faces initial fixed costs and marginal costs. If P = MC, no firm will do research to invent ideas. This means that The fixed research costs will never be recovered.

Regarding the solow growth model, output can be understood as...

A function of consumption and investment called a "resource constraint" C + I = Y (here it is assumed there are no exports or imports)

What are the five parameters in the Solow model?

A, s, d, L, K0

You are an economist working for the International Monetary Fund. Your boss wants to know what the total factor productivity of China is, but all you have is data on per capita GDP, y, and the per capita capital stock, k. If you assume that capital's share of GDP is one-third, what would you use to find total factor productivity?

Abar = y/(k^(1/3))

What are the parameters in the production model?

Abar, Kbar, Lbar

According to ________, there exists a negative relationship between cyclical unemployment and the GDP gap. A Okun's Law B sticky wages C Law of Supply D the Phillips Curve

c. complete separation of the nominal and real sides of the economy.

According to the classical dichotomy, in the long run there is: a. accelerating economic growth. b. perfect connectivity between the nominal and real sides of the economy. c. complete separation of the nominal and real sides of the economy. d. no growth after the economy reaches the steady state. e. zero inflation

c. determined by the ratio of the effective quantity of money to the volume of goods.

According to the quantity theory of money, the price level is: a. exogenous. b. determined by the money supply only. c. determined by the ratio of the effective quantity of money to the volume of goods. d. indeterminate in the long run. e. determined by the volume of goods produced.

Name 2 differences between the Solow model and production model:

Added dynamics of capital accumulation Omit capital and labour markets and their prices

Which of the following can be used to give firms incentive to innovate?

All of these answers are correct.

Which of the following is an exogenous variable in the Solow model? productivity the depreciation rate the saving rate the initial capital stock All of these answers are correct.

All of these answers are correct.

What is an explanation for why an economy eventually settles in steady state? The production function exhibits diminishing returns to capital. The capital stock depreciates at a constant rate. Eventually, investment generated is equal to the amount of capital depreciated. All of these choices are correct.

All of these choices are correct.

Profits are not the only way to encourage innovation. Give 3 other examples

Altruistic generosity Desire to signal skills "Purpose motives"

Amy is working part-time. Tavaris is on temporary layoff. Who is included in the Bureau of Labor Statistics' "employed" category? a. only Amy b. only Tavaris c. both Amy and Tavaris d. neither Amy nor Tavaris

b. long-term growth does not continue.

An implication of the Solow model is that once an economy reaches the steady state: a. long-term growth continuesindefinitely. b. long-term growth does not continue. c. long-term growth accelerates. d. long-term growth decelerates. e. None of these answers is correct.

a. the saving rate; the depreciation rate

An increase in _____ leads to a higher steady-state level of output, and an increase in _____ leads to a lower steady-state level of output. a. the saving rate; the depreciation rate b. the saving rate; productivity c. productivity; the initial capitalstock d. the depreciation rate; the laborstock e. None of these answers is correct.

If we compress the vertical axis at "key doubling points," we call this: a. the logarithmic scale d. the quadratic scale b. the ratio scale e. the geometric scale c. the exponential scale

a. productivity; saving rate

An increase in ________ leads to a higher steady-state level of output per worker, and a decline in the ________ leads to a lower steady-state level of output per worker. a. productivity; saving rate b. the saving rate; initial capital stock c. the saving rate; depreciation rate d. the initial capital stock; savings rate e. None of these answers is correct.

b. the labor demand curve shifting left.

An increase in labor regulations results in: a. the supply curve shifting left. b. the labor demand curve shifting left. c. the labor supply curve shifting left and the labor demand curve shifting right. d. the labor demand curve shifting right. e. neither the labor supply nor the demand curve shifting.

An increase in the unemployment rate is always a sign that the economy is performing worse. A True B False

Name 3 demographics who are hurt during inflation...

An individual who has a pension that is not indexed to inflation A bank that issues loans at fixed rates but that pays interest rates that move with the market An individual with a variable rate mortgage

Wages in ancient Greece and Rome were approximately equal to wages in seventeenth-century France.

Answers: a. Job loss in certain sectors b. Increased income inequality c. Global warming d. All of these choices are correct.(correct)

What is the principle of transition dynamics?

Any time an economy is away from the steady-state capital-labor ratio, forces will naturally return the economy to the steady state. The farther it gets, the faster it bounces back.

e. 0.70

As an economist working at the International Monetary Fund, you are given the following data for Italy: observed per capita GDP, relative to the United States, is 0.69; predicted per capita GDP (also relative to the US), given by y = k 1/3, is 0.98. What is total factor productivity of Italy relative to the US? a. 0.75 d. 0.81 b. 0.68 e. 0.70 c. 0.99

c. 0.0556

As an economist working at the international Monetary Fund, you are given the following data for Burundi: observed per capita GDP, relative to the United States, is 0.01; predicted per capita GDP, given by y = k ^(1/3), is 0.18. What is total factor productivity? a. 0.44 d. 0.00 b. 0.98 e. 18.00 c. 0.0556

more; flatter

As markets become less competitive, prices become ____ (more/less) sticky, and the Phillips Curve becomes _______ (steeper/flatter).

Explain what happens to capital stock with a decrease in the investment rate.

As the capital stock drops, the gap between the high level of depreciation and the lower level of savings will also drop.

Show algebraically that The stock of knowledge depends on its initial value and its growth rate

At = Abar₀(1+gbar)^t

The production function, Yt = A Kt^1/3 Lt^1/3 where At is the stock of ideas, Kt is capital, and Lt is labor, assumes:

At is nonrivalrous.

In 2015, The Avengers: Age of Ultron generated about $191.2 million on its opening weekend. In 2007, Spider Man 3 generated $151.1 million on its opening weekend. If the CPI in 2000 was 100, the CPI in 2007 was 113.4, and the CPI in 2015 was 137.6, ________ is the larger single-day grossing movie, with about ________ million in revenues in 2000 dollars.

Avengers; $138.9

In 2015, The Avengers: Age of Ultron generated about $191.2 million on its opening weekend. In 2007, Spider Man 3 generated $151.1 million on its opening weekend. If the CPI in 2000 was 100, the CPI in 2007 was 113.4, and the CPI in 2015 was 137.6, ________is the larger single-day grossing movie, with about ________ million in revenues in 2000 dollars.

Avengers; $138.9

1. Which of the following does macroeconomics endeavor to answer? i. Why is the typical person in the United States today more than ten times richer than the typical person a century ago? ii. Why has the unemployment rate been nearly twice as high in Europe as in the United States in recent years? iii. What determines the rate of inflation? What determines how rapidly the overall price level in an economy increases? a. i only d. i and ii b. i, ii, and iii e. ii and iii c. ii only

19. The president of the World Bank has asked you to calculate the average population growth rate of Hungary from 1970 to 2010. You know the population in 1970 was about 10.4 million and in 2010 about 9.5 million. The average growth rate is about: a. 0.2 percent d. 2.7 percent b. -0.2 percent e. -200 percent c. 98.4 percent

20. Real GDP is the ________ of all goods and services produced in a period of time using ________ prices. a. summation; current d. value; 1945 b. value; base year e. summation; base year c. value; 1970

20. Suppose that in 1960 Japan had an initial per capita GDP of $12,000 per year and China had a per capita GDP of $5,000. But China is growing at 5 percent per year and Japan is growing at 3 percent per year. ________ is richer in 2010 with a per capita GDP of approximately ________. a. Japan; $5,000 d. China; $73,500 b. Japan; $31,500 e. Not enough information is given. c. China; $7,500

21. If the percent change in the price level is ________ than the percent change in ________, ________. a. smaller; nominal GDP; real GDP shrinks b. greater; nominal GDP; real GDP shrinks c. greater; real GDP; nominal GDP shrinks d. greater; real GDP; nominal GDP always stays the same e. Not enough information is given.

22. In 1960, approximately ________ of the world's population lived on less than $5 per day, and the rate has ________ steadily since. a. 10 percent; fallen d. one-third; fallen b. two-thirds; fallen e. two-thirds; risen c. 10 percent; risen

25. To get a more accurate view of the size of countries' economies, we first need to convert each country's GDP to the dollar using ________ and then adjust for ________. a. the interest rate; the exchange rate b. the exchange rate; price level differences c. price level differences; the interest rate d. the exchange rate; fiscal policy e. fiscal policy; the exchange rate

4. Which of the following questions should a successful model predict? i. How do changes in government policies change the labor market? ii. How does money supply influence inflation? iii. How does investment affect economic growth? a. ii only d. i and ii b. i, ii, and iii e. i and iii c. iii only

9. Which measure of overall economic activity was not available in the 1930s? a. Stock prices d. Steel production b. GDP e. Gold prices c. Industrial production

In the combined Solow-Romer model, why is long-run growth sustained?

Because of the nonrivalry of ideas.

d. 1.077

Between 1970 and 1976, Israel's average inflation rate was about 65 percent per year. With that rate of inflation, prices would double about every years, using the rule of 70. a. 93 d. 1.077 b. 107.7 e. 9.3 c. 0.95

5. Which of the following questions should a successful model predict? i. How do changes in government policies change the labor market? ii. How does money supply influence inflation? iii. What is the relationship between inflation and unemployment? a. iii only d. i and ii b. ii only e. i and iii c. i, ii, and iii

8. When we look at the ________ we are concerned with ________. a. long run; money supply b. long run; causes of economic fluctuations c. long run; causes of economic growth d. long run; causes of inflation e. long run; unemployment

Assume that both Japan's and the United States' average annual per capita GDP growth rates are 2 percent per year, and both countries began with an initial per capita GDP of $1,000. However, the United States has been growing since 1910 and Japan only since 1960. In 2010, the United States would have been ________ than Japan. a. 0.37 times poorer d. 4,555 times richer b. 99 times richer e. 0.269 times poorer c. 2.69 times richer

If per capita GDP in 2014 was $1,000 and in 2015 was $1,200, the growth rate of per capita GDP was: a. 1.2 percent d. 120 percent b. about 17 percent e. Not enough information is given. c. 20 percent

If the 130,000-year period since anatomically modern humans made their first appearance were compressed into a single day, economic growth would have begun in the last ________. a. three hours d. half hour b. hour e. two hours c. three minutes

The birthplace of modern economic growth was in ________ during the ________ century. a. Japan; mid-twentieth d. China; late twentieth b. the United States; mid-nineteenth e. Germany; early nineteenth c. the United Kingdom; mid-eighteenth

Until about 12,000 years ago, humans were ________; at that point ________ led to the first towns and true economic development. a. farmers; the Bronze Age b. hunters and gatherers; the Iron Age c. hunters and gatherers; agriculture d. hunters and gatherers; universities e. farmers; industry

To recap, in the Solow Model, what is the Resource constraint

C + I = Y

As an economist working at the International Monetary Fund, you are given the following data for Brazil: predicted per capita GDP, relative to the United States, as given by y = k^(1/3), is 0.56, and total factor productivity is 0.36. What is the observed per capita GDP, relative to the United States? A 0.92 B 1.57 C 0.20 D 0.56 E 0.81

C 0.20

One explanation for the difference between the predicted output per person and the observed per capita GDP in Table 4.1 is differences in: A Per capita capital B The labor supply C Factor productivity D Labor's share of GDP E None of these answers are correct

C Factor productivity

The marginal product of the labor curve represents: A The demand for wages B The supply of labor C The demand for labor D The demand for capital E The supply of wages

C The demand for labor

If the production function is given by Y = K^( 1/3)L^(2/3) and K = 27 and L = 8, total output equals: A Y = 1 B Y = 18 C Y = 12 D Y = 8

C Y = 12

In the Romer model, if Canada and Taiwan have the same fraction of researchers and the same knowledge efficiency parameter but Canada's population is larger, then...

Canada has a higher per capita output growth rate.

In the Romer model, if Canada and Taiwan have the same fraction of researchers and the same knowledge efficiency parameter but Canada's population is larger, then:

Canada has a higher per capita output growth rate.

A central lesson of the Solow model is a bit of a surprise:

Capital accumulation cannot serve as the engine of long-run per capita economic growth.

A central lesson of the Solow model is that . . .

Capital accumulation cannot serve as the engine of long-run per capita economic growth.

What is the mechanism in the Solow model that generates growth?

Capital accumulation.

What can we double in the production function to get constant returns?

Capital and labor.

Countries with high investment rates have high . . .

Capital-output ratios (K/Y).

What are we concerned with when we look at the short run?

Causes of economic fluctuations.

What are we concerned with when we look at the long run?

Causes of economic growth.

Suppose that in 1960 Japan had an initial per capita GDP of $12,000 per year and China had a per capita GDP of $5,000.But China is growing at 5 percent per year and Japan is growing at 3 percent per year. ________ is richer in 2010 with a per capita GDP of approximately ________.

China; $5,000

Suppose that in 1965 Japan had an initial per capita GDP of $12,000 per year and China had a per capita GDP of $5,000. But China is growing at 5 percent per year and Japan is growing at 3 percent per year. ________ would have been richer in 2015 with a per capita GDP of approximately ________.

China; $57,337

Solving the Solow Model

Combine the investment allocation and capital accumulation equation Substitute the fixed amount of labor into the production function If the amount of investment > depreciation - capital stock will increase until intersection -- Here, the change in capital is equal to 0. -- The capital stock will stay at this value of capital forever. -- This is called the steady state. If depreciation is greater than investment - the economy converges to the same steady state as above.

One of the key characteristics of the Cobb-Douglas production function is . . .

Constant returns to scale.

Silver, gold, and chocolate are examples of:

Commodity money

According to the classical dichotomy, in the long run there is:

Complete separation of the nominal and real sides of the economy

Explain The production function of the Romer model and it's returns to scale

Constant returns to scale in objects alone With Increasing returns to scale in objects and ideas

Conventional wisdom is that most of the natural rate of unemployment is due to (a) frictional unemployment (b) bad fiscal policy (c) cyclical unemployment (d) structural unemployment (e) bad monetary policy

relating to The Empirical Fit of the Production Function, Diminishing returns to capital implies that...

Countries with low K will have a high MPK Countries with a lot of K will have a low MPK, and cannot raise GDP per capita by much through more capital accumulation

Consider two countries, labeled 1 and 2. Each has the production function , Yi = AbarKbar^ 1/3L^2/3 i = 1, 2. If the only difference between the two countries is that A1 > A2 then...

Country 1 will produce more than Country 2, ceteris paribus

What is the Solow resource constraint?

Ct + It = Yt

In the Solow model, defining (s) as the saving rate, Yt as output, and (It) as investment, consumption is given by:

Ct = (1 - s)Yt

consumption defined when referring to the solow growth model is...

Ct = (1-sbar)Yt sbar = fraction of total output invested

Solve the Solow model for the steady state level of consumption.

Ct* = (1 - s)Yt*

Cyclical unemployment refers to: a. the portion of unemployment created by job search. b. short-run fluctuations around the natural rate of unemployment. c. changes in unemployment due to changes in the natural rate of unemployment. d. the portion of unemployment created by wages set above the equilibrium level.

19. Nominal GDP is the ________ of all goods and services produced in a period of time using ________ prices. a. value; 1945 d. value; current b. summation; current e. summation; base year c. value; a previous year's

28. Despite the costs associated with economic growth, most believe: a. they will get only higher d. the benefits far outweigh the costs b. there are not too many benefits e. the benefits are negative c. they are higher than the benefits

3. ________ variables are parameters to the model and generally are fixed over time, while ________ variables are the outcome of the model. a. Shocks; parameters d. Exogenous; endogenous b. Endogenous; exogenous e. Parameters; system c. Endogenous; shocks

According to historical data, the wages in ancient Greece and Rome were ________ in sixteenth-century Britain or eighteenth-century France. a. somewhat lower than d. about the same as b. a lot higher than e. None of these answers are correct. c. a lot lower than

Developed countries' average incomes rose from about ________ in 1700 to about ________ today. a. $1,000; $30,000 d. $500; $45,000 b. $2,500; $50,000 e. $500; $100,000 c. $500; $70,000

The production function Y = K^(1/3)L^(2/3) describes: A) How any amount of capital and labor can be combined to generate output B) How particular amounts of capital and labor can be combined to generate output C) How any amount of capital and a particular amount of labor can be combined to generate output D How any amount of labor and a particular amount of capital can be combined to generate output

The study of economic growth concentrates on understanding the determinants of: a. the rate of price changes b. the short-term change in per capita GDP c. the rate of population growth d. the change in per capita GDP over time e. None of these answers are correct.

Which of the following people benefits from a surprise increase in inflation? A.A person receiving a fixed pension B.A lender of large amounts of money who is repaid on a fixed schedule C.A person with a variable rate mortgage D..A person who borrowed large amounts of money on a fixed payment schedule

D.A person who borrowed large amounts of money on a fixed payment schedule

decline; declines

During recessions, the job finding rate tends to _________ (rise/decline), while the job separation rate _________ (rise/declines).

24. Suppose we calculate the percent change in real GDP from year 1 to year 2 using both the Laspeyres and the Paasche indices. With the Laspeyres index we get 12 percent and with the Paasche index we get 9 percent. The chain-weighted growth of real GDP is: a. 1.5 percent d. 9.5 percent b. 9.75 percent e. 10.5 percent c. 1.33 percent

According to the rule of 70, if an economy averages a 4 percent growth rate, it will take about ________ years to double in size. a. 2.8 d. 5.7 b. 1,750 e. 17.5 c. 0.06

The era of modern economic growth began about: a. the time of the Egyptian pharaohs d. the time of the Renaissance b. 500 years ago e. 300 years ago c. the time of Caesar

The law of diminishing marginal product to capital means that as we add additional units of capital: A And labor, output will increase but at a constant rate B And labor, output will increase but at a decreasing rate C But hold labor constant, output will increase but at an increasing rate D But hold labor constant, output will increase but at a constant rate E But hold labor constant, output will increase but at a decreasing rate

E But hold labor constant, output will increase but at a decreasing rate

________ are parameters to the model and generally are fixed over time, while ________ are the outcomes of the model.

Exogenous variables; endogenous variables

Explain 3 costs of economic growth

Environmental problems Income inequality across and within countries Loss of certain types of jobs

What are the costs of economic growth?

Environmental problems, income inequality across and within countries, loss of certain types of jobs.

If a variable is growing at a positive constant rate, when plotted on a ratio scale, the slope of the plot will be becoming steeper over time.

False

If the marginal product of capital is less than the rental rate of capital, the firm should rent more capital.

False

If the production function is given by Y = K^1/3 x L^2/3, then labor's share of GDP is one-third. True False

False

The investment rate in a particular economy is a function of the amount of output (income) an economy generates each year. T/F

False Although rich and poor countries often have different investment rates, the investment rate is an exogenously given parameter in the Solow model. Unless shocked, it does not change over time.

If an economy has a higher investment rate and a higher depreciation rate, the economy will have a higher level of output. T/F

False We cannot tell where the steady states are from this info

The neutrality of money says that changes in the money supply...

Have no real effects on the economy and Only affect prices Empirically, this Holds in the long run buy Does not hold in the short run. nominal prices do not respond immediately to changes in the money supply

According to the Solow model, in the steady state, countries with high saving rates should have a . . .

High capital-output ratio.

What is higher steady state production caused by?

Higher productivity (Abar) and investment rate (s).

Labor demand is a function of the marginal product of labor, changes in output prices, and labor regulation. A heavily regulated labor market reduces the demand for labor. Removing these restrictions would increase the demand for young labor and commensurately increase their wages.

Historically, young French workers (under age 25) have had relatively high unemployment rates: 21 percent in 2005. In 2006, the French government proposed to allow employers to fire young employees without cause (eliminating a labor restriction). How should this policy improve employment prospects for young French workers? What would the impact be on their wages? Use a graph to guide your analysis.

What does a production function tell us?

How much output can be produced given any number of inputs, laborers, and machines.

Liquidity is a measure of:

How quickly an asset can be converted to currency

What explains TFP differences?

Human capital Technology Institutions Misallocation

What flowchart best summarizes Romer's description of ideas and growth?

Ideas → Nonrivalry→ Increasing returns → Imperfect competition

4 factors impact TFP, what are these and how do they work?

Human capital - Stock of skills that individuals accumulate to make them more productive - Education and training Technology - Richer countries may use more modern and efficient technologies than poor countries. - Increases productivity parameter Institutions - are in place to foster human capital and technological growth by... - Property rights - The rule of law - Government systems - Contract enforcement Misallocation - Resources not being put to their best use e.g. - Inefficiency of state-run resources - Political interference

Why are some countries more efficient at using capital and labor?

Human capital, technology, and institutions.

To recap, in the Solow Model, what is the allocation of resources equation?

I = sbar x Y

Explain how nonrivalry leads to increasing returns in the two key production functions of the Romer model.

Ideas get used twice in the same model: once to create output and once to create new ideas.

Draw the idea diagram related to the romer model

Ideas → Nonrivalry → Increasing returns → Problems with pure competition

Which of the following flowcharts best summarizes Romer's description of ideas and growth?

Ideas → Nonrivalry → Increasing returns → Imperfect competition

a. the money growth rate lead one-for-one to changes in the inflation rate in the long run.

If long-run real GDP growth is determined by real changes in the economy, the quantity theory of money implies that changes in: a. the money growth rate lead one-for-one to changes in the inflation rate in the long run. b. the money growth rate lead one-for-one to changes in the inflation rate, but only in the short run. c. velocity lead one-for-one to changes in the inflation rate. d. the money growth rate lead to a greater than one-for-one change in the inflation rate in the long run. e. None of these answers is correct

d. diminishing returns to capital in production.

If the depreciation and saving rates are constant, the economy eventually will reach the steady state in the Solow model because of: a. the lack of productivity. b. increasing returns to capital in production. c. constant returns to capital in production. d. diminishing returns to capital in production. e. increasing returns to labor in production.

c. the real interest rate is negative.

If the inflation rate is larger than the nominal interest rate: a. unemployment rises. b. the real interest rate is zero. c. the real interest rate is negative. d. the real interest rate is larger than the nominal interest rate. e. Not enough information is given.

d. is lower than firms are willing to pay for labor.

If the minimum wage is set below the equilibrium market wage, it: a. increases unemployment. b. is effective and reduces unemployment. c. equals the black market wage. d. is lower than firms are willing to pay for labor. e. None of these answers is correct.

c. in the short run, the real interest rate can deviate from the marginal product of capital.

If the real interest rate is negative, it must mean that: a. in the short run, bond rates can be very volatile. b. in the short run, the real interest rate equals the marginal product of capital. c. in the short run, the real interest rate can deviate from the marginal product of capital. d. it is difficult to predict long-term interest rates. e. there is no relationship between long- and short-term interest rates.

What is the rule of 70

If y grows at a rate of g percent per year, then the number of years it takes y to double is approximately equal to 70/g

What is the Rule of 70?

If yt grows at a rate of g percent per year, then the number of years it takes yt to double is approximately equal to 70/g.

If π = π^e, the macroeconomy is (a) not enough information (b) in an expansion (c) in a recession (d) at its potential level of output

Explain 3 benefits of economic growth

Improvements in health Higher incomes Increase in the variety of goods and services

What are the benefits of economic growth?

Improvements in health, higher incomes, increase in the variety of goods and services.

c. $1.16

In 1979, in the face of rising competition in the fast food hamburger market, McDonald's reduced the price of its cheeseburger to $0.43. If the CPI in 1979 was 37.2 and the CPI in 2005 was 100, what is the price of a 1979 cheeseburger in 2005 dollars? a. $0.77 b. $7.36 c. $1.16 d. $0.43 e. $0.14

e. $6.17

In 2015, the Wendy's Junior Cheeseburger Deluxe was on the "Right Price Right Size" menu and was priced at $1.89. If the CPI in 1979 was 72.6 and the CPI in 2015 was 237.0, what is the price of a 2015 cheeseburger in 1979 dollars? a. $4.28 b. $8.06 c. $0.97 d. $0.58 e. $6.17

In June 2009 the Bureau of Labor Statistics reported an adult population of 234.9 million, a labor force of 154 million and employment of 141.6 million. Based on these numbers the unemployment rate was: a. 93.3/234.9. b. 12.4/234.9. c. 93.3/154. d. 12.4/154.

In June 2009 the Bureau of Labor Statistics reported an adult population of 234.9 million, unemployment of 12.4 million, and employment of 141.6 million. Based on these numbers the labor-force participation rate was: a. 154/234.9. b. 141.6/234.9. c. 141.6/154. d. None of the above is correct.

Use the Solow model to explain what happens to the economy with a decrease in the investment rate.

In period 1, consumption increases and investment decreases resulting in negative net investment, but capital stock and output (income) do not change. In period 2, the capital stock will start falling toward its new steady-state level. At first, the drop in capital stock will be rapid (net investment is the most negative), but eventually it will come to rest at the new, lower level of capital stock.

a. labor's share of GDP is two-thirds.

In the Cobb-Douglas production function Y = K^(a)L^(1-a), if a = 1/3 then: a. labor's share of GDP is two-thirds. b. labor's share of GDP is one-third. c. capital's share of GDP is two-thirds. d. capital's share of income is one. e. labor's share of income is three

e. output growth accelerates.

In the Romer model, if an economy's population increases: a. output growth decelerates. b. output immediately increases and output growth slows. c. output immediately decreases and output growth slows. d. output immediately decreases and output growthaccelerates. e. output growth accelerates.

What is the principle of transition dynamics in the combined Solow-Romer model?

In the Solow-Romer model, the economy has a balance rate of growth, where the capital stock, output, and total factor productivity grow at constant rates. A change in the underlying parameters of the model can alter the growth rate temporarily, but due to diminishing returns to capital the economy will transition back to a balanced rate of growth. The further it is below its balanced growth per capita output, the faster it will bounce back.

In the second quarter of 2009, Real GDP was $14,347.1 while Potential GDP was $15,363.7. How large was the GDP Gap? A 6.62% B -7.09% C 7.09% D -6.62%

Solving mathematically for the steady state...

In the steady state, investment equals depreciation. Substitute into the production function: Solve for K* The steady state level of capital is: Positively related to the - investment rate - the size of the workforce - the productivity of the economy Negatively correlated with - the depreciation rate

Regarding The Rising Return to Education, what should happen theoretically and what has happened in actuality?

In theory: wages↑ → supply↑ → wages↓ In actuality: Wages↑ → supply↑ → demand↑ → ∆demand>supply → wages↑

Nonrivalry of ideas and the standard replication argument imply the production function will have . . .

Increasing returns to scale.

The Solow model experiences transition dynamics, The Romer model however does not. What occurs instead?

Instead, has balanced growth path Constant growth rates of all endogenous variables

Goods that are produced in a different year than they are sold are called...

Inventory goods

In Figure 5.2, steady-state investment is represented by:

Investment is not represented.

What is the Solow allocation of resources equation?

It = sYt Therefore, Ct = (1 - s)Yt

Solve the Solow model for the steady state level of investment.

It* = sYt*

In the Solow model, defining s as the saving rate, Yt as output, and Ct as consumption, investment It is given by:

It=sYt

What is the equation for demand = supply for capital in the production model?

K = Kbar

Regarding the solow growth model, Goods invested for the future determine the accumulation of capital. This concept is expressed through the "capital accumulation equation". What is this?

K(t+1) = next years capital K(t) = this years capital I(t) = this years investment dbar = depreciation rate (the depreciation rate is between 0 and 1 and is usually assumed to be 0.07 or 0.1)

...

Know Solow Diagram Questions

In the Romer model, ________ is the driving force behind sustained ________ economic growth.

Knowledge; long-term.

Solve the Solow model for the steady state level of capital.

Kt* = ((s/d)Abar)^(3/2)Lbar

What is the Solow capital accumulation equation?

Kt+1 = Kt + It - dKt

In the Solow model, the equation of capital accumulation is:

Kt+1= Kt+ It -dKt

...

Lecture 10 Suppose an economy is hit with a positive oil price shock in one period that raises the level of oil prices permanently. If adaptive expectations hold, this will a.shift the AS curve up initially and then shift the AS curve back to original position in the following period. b.shift the AS curve up initially and gradually shift the AS curve back to original position over time. c.shift the AS curve up permanently. d.shift the AS curve down permanently.

...

Lecture 2 If a country's income grows at 1 percent per year, It will take about __ years for income to double.

...

Lecture 2 How quickly GDP doubles will depend on a.the initial value of GDP b.the growth rate of GDP c.the current value of GDP d.All of these choices are correct.

...

Lecture 2 If Y= AK^(1/3)L^(2/3) and A grows at a rate of 1 percent per year, K grows at a rate of -3 percent per year, and L grows at a rate of 3 percent per year, then the growth rate of Y is a.0 percent. b.1 percent. c.2 percent. d.3 percent.

...

Lecture 2 If growth is slightly faster at 5 percent per year•Income doubles every ______years.

...

Lecture 2 If population doubles every 35 years, then the growth rate of population is a.1 percent. b.2 percent. c.3 percent. d.4 percent.

...

Lecture 2 United States per capita GDP 1870: $3,200 •United States per capita GDP 2015:$50,800. •What is the average annual growth rate over these 145 years?

...

Lecture 2 With an average annual growth rate of 5 percent per year, per capita income will increase by what factor over a century? a.16 b.32 c.64 d.126

...

Lecture 4 An economy starts in steady state. A war causes a massive destruction of the capital stock. This shock will cause... a.the economy to converge to a new lower steady state. b.the growth rate of output to rise initially as the economy begins to converge to the old steady state. c.the growth rate of output to rise initially as the economy begins to converge to a new lower steady state. d.the economy to enter a period of negative growth.

...

Lecture 4 Imagine increases in the parameters of the Solow model that are all identical in magnitude. Which one of the following parameters will result in the largest increase in steady-state output? a.the investment rate b.the productivity parameter c.the amount of labor d.They all will increase output by the same amount.

...

Lecture 4 Starting from steady state, a permanent increase in the rate of depreciation in the Solow model causes... a.the growth rate of output to fall temporarily and the level of GDP to fall permanently. b.the growth rate of output to fall temporarily but leaves the level of GDP unchanged in the long run. c.the growth rate of output to rise temporarily and the level of GDP to rise permanently. d.the growth rate of output to rise temporarily but leaves the level of GDP unchanged in the long run.

...

Lecture 6 Which of the following is an example of cyclical unemployment? a.A worker loses her job because the minimum wage increases substantially. b.A worker quits her job to find a better job. c.A worker is unemployed because the cost of finding a job in another city is too high. d.A worker loses her job because the economy begins to enter a recession.

...

Lecture 6 A country has a total civilian population (over age 16) of 300 million. Of this population, 225 million are employed, 25 million are unemployed, and the remainder of the population is not in the labor force. The unemployment rate is a.0.083 .b.0.100. c.0.111. d.0.150.

...

Lecture 6 According to the bathtub model of unemployment, which of the following statements is true if a law permanently increases only the job finding rate? a.The natural rate of unemployment will fall. b.The natural rate of unemployment will rise. c.The unemployment rate will fall, but the natural rate of unemployment will be unchanged. d.The unemployment rate will rise, but the natural rate of unemployment will be unchanged.

...

Lecture 9 Suppose prices adjust immediately because there is no sticky inflation. Then, monetary policy will a.have only real effects. b.have only nominal effects. c.have both real and nominal effects d.have no effect.

...

Lecture 6 If a tax is imposed on labor supply and wages are rigid, wages and the employment-population ratio will be lower than the market clearing level after the shock a.true b.false

...

Lecture 7 If real GDP is growing at a rate of 2 percent, the central bank should grow the money supply at a rate of 2 percent to keep prices unchanged a.true b.false

...

Lecture 7 If the real interest rate is 3 percent and the nominal interest rate is 1 percent, then the economy is experiencing deflation according to the Fisher equation. a.true b.false

...

Lecture 7 The quantity theory of money says that a doubling of the growth rate in the money supply will, in the long run, lead to a.a doubling of real GDP growth. b.a doubling of inflation. c.a decrease of inflation. d.a doubling of the price level.

...

Lecture 7 Under the classical dichotomy, which of the following does not determine real GDP in the long run? a.the investment rate b.the aggregate price level c.TFP d.new ideas

...

Lecture 7 What is the price in 2015 dollars of a loaf of bread with price of 25 cents in 1980?

...

Lecture 7 Which of the following people benefits from a surprise increase in inflation? a.a person receiving a fixed pension b.a person with a variable rate mortgage c.a person who borrowed large amounts of money on a fixed payment schedule d.a lender of large amounts of money who is repaid on a fixed schedule

...

Lecture 9 If the aggregate demand parameter increases and the central bank wishes to stabilize output at potential, it should a.raise the nominal interest rate b.lower the nominal interest rate. c.buy government bonds. d.expand the money supply.

Suppose you are given the data for Brazil and Portugal. In Brazil, the saving rate is 0.1 and the depreciation rate is 0.1, while in Portugal the saving rate is 0.2 and the depreciation rate is 0.1. Using the Solow model, you conclude that in the steady state:

Portugal has a higher capital-output ratio than Brazil

Portugal has a higher capital-output ratio than Brazil.

What does solving the quantity theory of money for prices show?

Prices will rise as a result of - Increases in the money supply - Decreases in real GDP In the long run, the key determinant of the price level is the money supply.

Expenditure Y = C + I + G + NX Income Compensation of Employees (Wages and Salaries & Benefits) + Taxes Less Subsidies on businesses + Net Operating Surplus of Business + Depreciation of Fixed Capital Production The value of the goods and services produced in an economy during a given period (NO DOUBLE COUNTING) only add value added

Production = Expenditure = Income

What are the five equations in the Solow model?

Production Function, Capital Accumulation, Labor Force, Resource Constraint, Allocation of Resources.

What are the five equations of the production model?

Production function, rule for hiring capital, rule for hiring labor, demand = supply for capital, demand = supply for labor.

If we want to calculate the Mexican real GDP in U.S. dollars but adjusted for prices what equation would we use?

Real GDP in mexico($) = (US price level)/(Mexican price level) x Nominal GDP (US)

Seignorage

Revenue that the federal government gets for printing money

Skill bias technical change

Rewarding people of specified skills, punishing people with obsolete skills.

Which of the following is NOT an example of capital?

Screws and bolts used for making cars at an automobile factory

Sectoral shifts in demand for output: a. create structural unemployment. b. immediately reduce unemployment. c. increase unemployment due to job search. d. do not affect demand for labor.

Compare Romer Model to Solow Model

Steady growth path in romer model. Solow model reaches a steady state. Solow model assumes perfect competition, Romer model assumes imperfect competition.

What kinds of unemployment make up the natural rate of unemployment?

Structural and Frictional

One of the most effective mechanisms for increasing research may simply be to . . .

Subsidize one of the key inputs into research: the education of scientists and engineers.

...

Suppose oil prices increase. Which of the following is true? a.Equilibrium wages are lower. b.Employment is lower. c.Both of these choices are correct. d.None of these choices are correct.

Suppose that Real GDP grows by 4%. How much will the unemployment rate change if everything else (Potential GDP, Natural Unemployment) remains constant? A The unemployment rate will fall by 2%. B The unemployment rate will grow by 8%. C The unemployment rate will fall by 8%. D The unemployment rate will grow by 2%.

Suppose that firms expect prices to rise by 2% next year and they maintain this belief regardless of what happens in the economy. These firms are said to form A anchored expectations. B sticky expectations. C rational expectations. D adaptive expectations.

e. 10.5

Suppose we calculate the percent change in real GDP from year 1 to year 2 using both the Laspeyres and the Paasche indices. With the Laspeyres index we get 12 percent and with the Paasche index we get 9 percent. The chain-weighted growth of real GDP is percent. a. 1.5 d. 9.5 b. 9.75 e. 10.5 c. 1.33

____ 2. These four steps, and in the following order, are used to study macroeconomic behavior: (1) document the facts; (2) develop a model; (3) compare the predictions of the model to the original facts; (4) use the model to make other predictions that eventually may be tested.

____ 3. In the short run, we are concerned with the causes of economic fluctuations and how to fix them.

____ 5. An exogenous variable is one that is taken as given, that is, a parameter.

The difference between total factor productivity (TFP) in the Solow model and the stock of ideas in the Romer model is that:

TFP is fixed and ideas can grow

How do you look at differences in Y/L?

Take the ratio of y* for two countries and assume the depreciation rate is the same. y*rich/y*poor = (Abarrich/Abarpoor)^(3/2)x(srich/spoor)^(1/2)

The "natural rate of unemployment" is the unemployment rate that would prevail (a) if people voluntarily leave work. (b) during changes in the business cycle. (c) if the unemployment rate were zero. (d) if the economy were in neither a boom nor a recession. (e) during seasonal changes in the economy.

What is The marginal product of labour (MPL) and how is it found?

The additional output that is produced when one unit of labour is added, holding all other inputs constant. This is found by taking the derivative of the production function holding capital constant

Macroeconomics is the study of ________ while microeconomics studies ________.

The overall performance of an economy; an individual market.

What is the crux of the Romer model?

The Distinction between ideas and objects and the idea that Output requires knowledge and labour

What is the key difference between the Solow model and the production model?

The Solow model endogenizes the process of capital accumulation.

Which of the following does NOT increase the U.S. GDP?

The U.S. government increases social security payments.

What is the The marginal product of capital (MPK) and how is it found?

The additional output that is produced when one unit of capital is added, holding all other inputs constant. This is found by taking the derivative of the production function with respect to capital

What is the depreciation rate?

The amount of capital that wears out each period. Must be between 0 and 1 in Solow model. Usually between 7 and 10 percent.

What is the idea of menu costs?

The costs to firms of changing prices frequently.

What is the steady state level of capital negatively related with?

The depreciation rate.

In "The cost of innovation has risen, and productivity has suffered", the Economist magazine discusses research by Bloom, Jones, Van Reenen, and Webb. They find evidence that productivity growth has been fairly constant in recent decades while the number of researchers has risen very sharply. How can the Romer model reviewed in class be reconciled with this empirical evidence? Hint: Use the equations of the Romer model to answer this question.

The fraction of researcher must be rising while their productivity is declining at the same time.

What is the steady state level of capital positively related with?

The investment rate (s), the size of the workforce (Lbar), the productivity of the economy (Abar).

What is GDP?

The market value of the final goods and services produced in an economy over a certain period.

What is Gross Domestic Product (GDP)?

The market value of the final goods and services produced in an economy over a certain period.

The natural rate of unemployment is the: a. unemployment rate that would prevail with zero inflation. b. rate associated with the highest possible level of GDP. c. difference between the long-run and short-run unemployment rates. d. amount of unemployment that the economy normally experiences.

The natural unemployment rate describes the unemployment rate when A the economy is no longer in a recession. B cyclical unemployment is positive. C frictional unemployment is 0. D real GDP is equal to potential GDP.

Write down the quantity equation in growth terms and identify each variable

The quantity equation is given by MtVt = PtYt where... M is money supply, V is velocity, P is the price level (GDP deflator or CPI), and Y is real GDP. In growth terms this is gbarM = π + gbarY because we assume that.. gbarV = 0.

The rise in the participation rate for the US. in the 1970's is largely due to (a) more women entering the labor force. (b) more teenagers entering the labor force. (c) a shrinking US population (d) an increase in immigrant workers. (e) it is unexplained.

a. double is approximately equal to 70/g.

The rule of 70 states that if yt grows at a rate of g percent per year then the number of years it takes yt to: a. double is approximately equal to 70/g. b. double is exactly equal to 70/g. c. double is approximately equal to g/70. d. triple is approximately equal to 70/g. e. double is approximately equal to 70/(1 + g).

According to the principle of transition dynamics, which economy will grow fastest?

The same country 1 year after the natural disaster destroyed most of the capital stockThe principle of transition dynamics says that an economy that is farther below its steady state will grow faster. The destruction of the capital stock places the economy further below its steady state 1 year after the destruction took place.

In the Solow model The economy consumes a fraction of output and invests the rest. This means that consumption is...

The share of output not invested C = (1-s)Y

If labor demand increases, holding supply constant, what happens to wage?

The wage and the employment- population ratio both rise.

Explain the concept of wave rigidity

The workers are rendered unemployed because at a given wage rate supply of labour exceeds demand for labour. ... It may be noted that stickiness or rigidity of money wage implies that money wage rate will not quickly change, especially in the downward direction to keep equilibrium at full employment level.

Efficiency Wages

Theory that if you raise wages, people will become more productive.

If there are constant returns to all inputs together, then . . .

There are diminishing returns to each input by itself.

What is Alwyn Young's "gift of dying"?

There is a "gift" because the more workers die, the more the living workers get paid.

The change in the capital stock is a flow variable. T/F

True A flow variable is one that lasts only for one period. Capital alone is a stock variable, but the change in capital is a flow variable.

Concerning the returns to scale of the Cobb-Douglas Production Function... When do increasing returns to scale occur?

When exponents sum to > 1

Total factor productivity explains a larger amount of the difference in income per capita in the Solow model than in the production model.

True TFP explains a larger difference in the Solow model, because productivity influences output in both models but also influences capital accumulation in the Solow model.

In the long run, the real interest rate is equal to the marginal product of capital. T/F

True The return to saving must equal the return to investment, which implies that the real interest rate equals the rental price of capital, which is equal to the MPK.

Unemployment is given by and the natural rate of unemployment is . (a) Frictional + Structural + Cyclical; Frictional + Structural (b) Frictional + Cyclical; Frictional + Cyclical (c) Frictional + Structural - Cyclical; Frictional + Structural (d) Structural + Cyclical; Structural (e) Cyclical; Frictional + Structural

Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills is called: a. the natural rate of unemployment. b. cyclical unemployment. c. structural unemployment. d. frictional unemployment.

Unemployment that results because the number of jobs available in some labor markets may be insufficient to give a job to everyone who wants one is called: a. the natural rate of unemployment. b. cyclical unemployment. c. structural unemployment. d. frictional unemployment.

Nominal GDP is the ______ of all goods and services produced in a period of time using ______ prices.

Value; current.

c. prevents the labor market from realizing equilibrium.

Wage rigidity: a. helps the labor market achieve equilibrium. b. prevents the capital market from realizing equilibrium. c. prevents the labor market from realizing equilibrium. d. prevents unemployment. e. None of these answers is correct.

tighter; rises; declines

When firms open more job positions, the labor market becomes (tighter/less tight), the job-finding rate (rises/falls) , and the unemployment rate (rises/declines).

Which of the following does macroeconomics endeavor to answer?

What role does the government play in recessions and booms and in determining the rate of inflation?

What is wage rigidity?

When Wages fail to adjust after a shock to labour demand or supply

Concerning the returns to scale of the Cobb-Douglas Production Function... When do constant returns to scale occur?

When exponents sum to 1

Concerning the returns to scale of the Cobb-Douglas Production Function... When do decreasing returns to scale occur?

When exponents sum to < 1

A, B & D

Which of the following groups are considered unemployed in the u-6 unemployment rate calculation? (check all that apply) A part-time workers looking for full-time positions B discouraged workers C retirees D workers who are marginally-attached to the labor force

e. None of these answers is correct.

Which of the following is a nonrival good? a. a peanut butter sandwich b. orange Juice c. a Jacket d. All of these answers are correct. e. None of these answers is correct.

d. Y = K^(1/2)L^(3/4)

Which of the following production functions exhibits increasing returns to scale? a. Y = K^(1/2)L^(1/2) b. Y = K^(a)L^(1-a) c. Y = K^(1/3)L^(2/3) d. Y = K^(1/2)L^(3/4) e. All of these answers are correct.

Which of the following statements is true if the job finding rate declines? (a) The steady-state rate of unemployment will fall and the duration of unemployment will rise. (b) The steady-state rate of unemployment will fall and the duration of unemployment will fall. (c) The steady-state rate of unemployment will rise and the duration of unemployment will rise. (d) The steady-state rate of unemployment will rise and the duration of unemployment will fall.

Which type of unemployment is associated with the longest duration of unemployment? A structural unemployment B frictional unemployment C cyclical unemployment

Who of the following would necessarily be included in the Bureau of Labor Statistics' "unemployed" category? a. Huey, who did not work during the previous four weeks b. Dewey, who tried to find new employment during the previous four weeks c. Louie, who was an unpaid worker during the previous four weeks d. None of the above is correct.

As an economist working at the International Monetary Fund, you are given the following data for Brazil: predicted per capita GDP, relative to the United States, as given by y = k^1/3, is 0.56, and total factor productivity is 0.36. What is the observed per capita GDP, relative to the United States? a. 0.20 b. 0.56 c. 0.81 d. 0.92 e. 1.57

Because of the dynamics of the workforce, for example, whether workers become discouraged when there are changes in the economy: a. the unemployment rate is not necessarily an accurate gauge of the labor market. b. the unemployment rate is a precise gauge of the labor market. c. one should only consider the employment-population ratio rather than the unemployment rate. d. at times the labor demand curve is upward sloping. e. None of these answers is correct.

Consider Figure 5.6. If K(SK) is the current capital stock in South Korea and K(CH) is the current capital stock in China, according to the principle of transition dynamics: a. China initially will grow faster than South Korea, but each will have the same steady state b. China initially will grow slower than South Korea, but each will have the same steady state c. China initially will grow faster than South Korea and will have a higher steady state d. China initially will grow faster than South Korea and will have a lower steady state e. Both South Korea and China initially will grow at the same rate and have the same steady state

Considering the data in Table 4.1 (Homework 3/4), the explanation for the difference between the predicted and actual level of output is called ________. If you compare India's observed and predicted output, this difference is equal to ________. a. total factor productivity; 0.22 b. labor's share of GDP; two-thirds c. capital's share of GDP; one-third d. liquidity; 0.05 e. the Solow residual; 4.5

Fiat money has value because: a. people believe it has value d. it has intrinsic value b. it is backed by silver e. it is a commodity c. it is backed by gold

If current output is Y(t)=$10 billion and potential output Y(bar)(t)=$10.5 billion, then the economy is is in a ________ and Y(~bar)(t) is about ________. a. recession; -4.7 percent b. boom; 4.7 percent c. boom; -4.7 percent d. recession; -5 percent e. boom; 5 percent

If not all price setters are convinced that high inflation rates will end soon, there is/are: a. a coordination problem. b. negative real interest rates. c. price staggering. d. substantial menu costs. e. a transfer of wealth from one group to another.

If some goods' prices adjust more quickly than others during a period of high inflation, there is: a. a short-run misallocation of resources. b. no inflation. c. a deflation. d. a perfect short-run allocation of resources. e. a hyperinflation.

If the current capital stock in South Korea is greater than the current capital stock in China, according to the principle of transition dynamics: a. China initially will grow faster than South Korea, but each will have the same steady state b. China initially will grow slower than South Korea, but each will have the same steady state c. China initially will grow faster than South Korea and will have a higher steady state d. China initially will grow faster than South Korea and will have a lower steady state e. Both South Korea and China initially will grow at the same rate and have the same steady state

In our balloon analogy, a hole in the balloon represents.: a. financial crisis. b. a hole in the balloon. c. fiscal policy. d. the thickness of the skin.

In the Romer model in Figure 6.1, at time t0, a change in the growth rate of per capita output can be explained by a(n): a. increase in the population. b. decrease in the population. c. increase in the saving rate. d. decrease in the ideas efficiency parameter. e. increase in the share of labor engaged in research.

In the Solow model, defining s(bar) as the saving rate, Yt as output, and It as investment, consumption is given by: a. Ct = (1 - s(bar))Yt b. Ct = s(bar)Yt c. Ct = s(bar)It d. Ct = (1 - s(bar))Yt - It e. Ct = (1 - s(bar))

In the labor market depicted in Figure 7.3 (Homework 3/22), an increase in the income tax would result in: a. a shift in labor supply from LS 1 to LS 2. b. a shift in labor demand from LD 2 to LD 1. c. a shift in labor demand from LD 1 to LD 2. d. no change in either the labor supply or demand curve. e. None of these answers is correct.

In the labor market depicted in Figure 7.3, an increase in the income tax would result in: a. a shift in labor supply from LS1 to LS2 b. a shift in labor demand from LD2 to LD1 c. a shift in labor demand from LD1 to LD2 d. no change in either the labor supply or demand curves e. None of these answers are correct.

In the standard production model, the productivity parameter enters the equation with an exponent of one, while in the Solow model it is greater than one because: a. the endogenous level of the capital stock itself depends on productivity b. there is no productivity parameter in the standard production function model c. the productivity measure is zero in the standard production function model d. the productivity measure is negative in the Solow model e. the exogenous level of the capital stock itself depends on productivity

Keynesian economists believe that consumers have money illusion, that is: a. they act on changes in nominal variables instead of real variables. b. they suffer from the illusion that they will be rich. c. they are fooled by the central bank. d. they act on changes in real variables instead of nominal variables.

Liquidity is a measure of: a. how quickly an asset can be converted to currency. b. the monetary base. c. the amount of reserves. d. how many coins are in circulation. e. how quickly coins can be melted down.

M2 includes M1 plus a. savings accounts. b. long-term bonds. c. large time deposits. d. gold reserves. e. overnight repurchase agreements.

The key insight in the Solow model is that: a. capital accumulation contributes to economic growth b. capital depreciation enhances economic growth c. savings have no impact on economic growth d. the relationship between capital and output is static e. saving rates are determined in a particular manner

The monetary base consists of: a. reserves and currency b. M1 plus M2 c. only M1 d. gold reserves plus currency e. a country's holdings of foreign and domestic currencies

The monetary base consists of: a. reserves and currency. b. only M1. c. M1 plus M2. d. gold reserves plus currency. e. a country's holdings of foreign and domestic currencies.

The parameter(s) in the Romer model is/are: a. the initial stock of ideas, the population, the fraction of population in the ideas sector, and the ideas efficiency parameter b. the ideas efficiency parameter c. the fraction of population in the ideas sector and the ideas efficiency parameter d. the initial capital stock and the fraction of population in the ideas sector e. the initial capital stock and the ideas efficiency parameter

The production function used in the Solow model is: a. Yt = A(bar)Kt^1/3 x Lt^2/3 b. Yt = A(bar)Kt^2/3 x Lt^2/3 c. Yt = A(bar)(K^1/3 + L^2/3) d. Yt = A(bar)(1/3)Kt x (2/3)Lt e. Yt = A(bar)(1/3)Kt + (2/3)Lt

The real interest rate describes the: a. rate of return adjusted for inflation. b. rate of return in units of a currency. c. rate of return in real goods. d. return with an interest rate equal to zero. e. net return to government bonds.

The rise in the employment-population ratio between 1950 and 2010 largely is due to: a. more women entering the labor force. b. an increase in immigrant workers. c. It is unexplained. d. more teenagers entering the labor force. e. a shrinking U.S. population.

The short-run model determines ________ and ________. a. current output; current inflation d. unemployment; potential output b. current output; long-run inflation e. potential output; unemployment c. unemployment; current inflation

What contributed to Reagan's defeat of Carter in the 1980 presidential election? a. double-digit inflation b. the low rate of unemployment c. the takeover of the U.S. embassy in Tehran, Iran d. Billy Carter's beer e. Margaret Thatcher

Assume two economies are identical in every way except that one has a higher saving rate. According to the Solow growth model, in the steady state, the country with the higher saving rate will have ________ level of total output and ________ rate of growth of output than/as the country with the lower saving rate.

a higher; a higher

a higher; the same

The equation Y F(K,L) AK1/3L2/3 is an example of :

a production function

The equation Y F(K,L) AKa L1 a is an example of:

a production function

Under national income accounting, GDP equals

a the goods produced in the economy. b. the income earned in the economy. c. the total purchases in the economy. d. All of these choices are correct.(correct answer)

Which of the following is a cost of economic growth?

a. Job loss in certain sectors b. Increased income inequality c. Global warming d. All of these choices are correct.

Output per person is higher when

a. a country is more efficient in adopting a technology. b. a country has a higher capital-to-population ratio. c. a country has stronger property rights and contract enforcement. d. All of these choices are correct.(CORRECT ANSWER)

If the U.S. trade deficit is reduced

a. capital inflows from abroad will likely be reduced. there my be disruption in the financial markets. interest rates will rise. *all of the answers are true.

Which of the following is/are the benefit(s) of economic growth?

a. increases in life expectancy b. reductions in infant mortality c. higher incomes d. an expansion in the range of goods and services available Answer: E. All of these answers are correct.

The costs of economic growth include which of the following?

a. pollution and the depletion of natural resources b. global warming c. increased income inequality d. technological advances, which may lead to the loss of specific jobs and industries Answer E. All of these answers are correct.

Which of the following is/are NOT included in the expenditure approach to national income accounting?

a. transfer payments d. changes in stock prices b. taxes e. All the above. c. Social Security

In the Solow model, if capital is in the steady state, output is...

also in the steady state.

Suppose the variable a grows at a constant rate , the variable b grows at a constant rate , the variable c grows at a constant rate , and the variable d grows at a constant rate . If we know that , what is the relationship between variables a, b, c, and d?

a=b^1/2 over d^1/2 c3/4

According to historical data, the wages in ancient Greece and Rome were ________ in fifteenth-century Britain or seventeenth-century France.

about the same as

The National Income and Product Accounts provides a system for aggregating the production of...

all goods and services into a single measure of economic activity.

Which of the following questions should a successful model predict? i. Why, in general, do Americans have higher incomes than Africans? ii. How much less unemployment is there during an economic expansion? iii. Why does the United States have a lower unemployment rate than Europe?

all of em

A government is more likely to utilize the inflation tax if A. It is running a budget deficit B. Lenders worry that the government will not pay back its debts C. Politicians will not raise taxes, because they cannot be reelected if they do D. All of the above are correct

all of the above

Which of the following production functions exhibits constant returns to scale?

all of these answers are correct

If a country is on its balanced growth path, then

all of these choices are correct. FEEDBACK: Page 151. Along a balanced growth path, the growth rates of all endogenous variables are constant.

An increase in the income taxes on wages results in: a. the labor demand curve shifting left b. the labor supply curve shifting left c. the labor supply and demand curves shifting left d. the labor demand curve shifting right e. neither the labor supply nor demand curves shifting

Any institutional fixed wage set above the equilibrium wage is called: a. the market wage d. a real rigidity b. the minimum wage e. a wage ceiling c. a wage rigidity

As an economist working at the International Monetary Fund, you are given the following data for Burundi: observed per capita GDP, relative to the United States, is 0.01; predicted per capita GDP, given by y = k^1/3, is 0.18. What is total factor productivity? a. 0.44 b. 0.06 c. 18.00 d. 0.98 e. 0.00

Because in many industries the cost of generating new ideas is so high, firms must charge a price ________ cost. a. lower than the marginal b. higher than the marginal c. lower than the average fixed d. equal to the average fixed e. equal to the marginal

Consider Figure 5.6. If K(SK) is the current capital stock in South Korea and K(CH) is the current capital stock in China, according to the principle of transition dynamics: a. South Korea will be richer than China, forever b. South Korea will initially grow slower, but incomes in China and South Korea will converge c. China and South Korea have different steady states d. South Korea will initially grow faster, but incomes in China and South Korea will converge e. China will initially grow slower, but incomes in China and South Korea will converge

Consider Table 4.1 (Homework 3/4), which compares the model y = K^1/3 to actual statistical data on per capita GDP. You observe the model: a. consistently underestimates the level of per capita GDP. b. consistently overestimates the level of per capita GDP. c. does a really good job of estimating the level of per capita GDP. d. clearly contains all factors that affect per capita GDP. e. None of these answers is correct.

Conventional wisdom is that most of the natural rate of unemployment is due to: a. bad fiscal policy d. structural unemployment b. frictional unemployment e. bad monetary policy c. cyclical unemployment

In March 2016, the United States imposed tariffs on steel imports from China. Using the labor market depicted in Figure 7.3 (Homework 3/22), this would have the impact on the steel labor market of shifting labor: a. supply from LS 2 to LS 1. b. demand from LD 2 to LD 1. c. demand from LD 1 to LD 2. d. supply from LS 1 to LS 2. e. None of these answers is correct.

In economics, a nonrival good is one that: a. cannot be consumed by more than one person at a time b. can be consumed by more than one person at a time c. can be consumed by more than one person at a time but is congested d. cannot be consumed by more than two persons at a time e. None of these answers are correct.

In our balloon analogy, fiscal policy represents: a. the money supply. b. heating or cooling the air molecules. c. the thickness of the skin. d. a hole in the balloon.

In the "bathtub model" of unemployment, in the steady state: a. cyclical unemployment equals frictional unemployment. b. the change in unemployment is zero. c. the job-separation rate is zero. d. employment is constant. e. the natural rate of unemployment is zero.

In the "bathtub model" of unemployment, in the steady state: a. employment is constant b. the change in unemployment is zero c. the natural rate of unemployment rate is zero d. cyclical unemployment equals frictional unemployment e. the job separation rate is zero

In the Romer model in Figure 6.1, at time t(0), a change in the growth rate of per capita output can be explained by: a. a decrease in the ideas efficiency parameter b. an increase in the population c. an increase in the research share d. an increase in the saving rate e. a decrease in the population

In the Romer model, ________ is the resource constraint. a. K=K(bar) and L=L(bar) d. Y(t)=A(t)K(t)^(*)L(t)^(1-*) b. L(t)=L(y)(t)+L(a)(t) e. There is no resource constraint. c. A(t)=infinity

In the Romer model, what two key goods are produced? a. a government good and new ideas b. a consumption good and new ideas c. a consumption good and total factor productivity d. a consumption good and capital e. None of these answers are correct.

John Maynard Keynes is famous for saying, "In the long run ________." a. there is no tomorrow b. we are all dead c. the only thing we have to fear is fear itself d. the study of economics will be redundant e. we will tear down this wall

Money made with silver, gold, and chocolate are examples of ________ money. a. fiat b. commodity c. backed d. government e. None of these answers is correct.

Negative inflationary surprises lead to: a. an increase in the real interest rate b. a redistribution of wealth from borrowers to lenders c. a decline in the nominal interest rate d. a decline in inflation risk for lenders e. a redistribution of wealth from lenders to borrowers

Oligopolies are able to make ______________ in the long-run. a. normal profits. b. economic profits c. only zero economic profits. d. only accounting profits.

On average, if both rich and poor countries grow at the same rate, this suggests that: a. no countries have reached their steady states. b. most countries have reached their steady states. c. most countries are unproductive. d. most countries still are growing. e. most countries are contracting.

One explanation for the difference between the predicted output per person and the observed per capita GDP in Table 4.1 is differences in: a. the labor supply. b. human capital. c. per capita capital. d. capital's share of GDP. e. None of these answers is correct.

Practically, in the long run the real interest rate is equal to: a. the return to stock markets. b. the marginal product of capital. c. the return to housing. d. a savings account. e. the rate of return to long-term bonds.

Silver, gold, and chocolate are examples of: a. fiat money d. government money b. commodity money e. None of these answers are correct. c. backed money

The Solow model of economic growth: a. endogenizes labor d. exogenizes investment b. endogenizes physical capital e. endogenizes investment c. exogenizes physical capital

The South Korea - Philippines comparison suggests: a. economists cannot offer any good advice towards economic development. b. there are still many unknowns about the causes of nation development and growth. c. economists have good predictive models for developing countries to utilize for future economic growth. d. economists have long-term nation building down to an exact science.

The amount of capital in an economy is a(n) ________, while the amount of investment is a(n) ________. a. flow; stock b. stock; flow c. final good; intermediate good d. intermediate good; final good e. None of these answers are correct.

The difference between total factor productivity (TFP) and the stock of ideas is that: a. TFP grows and ideas are fixed d. TFP is rivalrous and ideas are not b. TFP is fixed and ideas can grow e. There is no difference. c. TFP is nonrivalrous and ideas are not

The explanation for the upward-sloping supply of labor curve is that: a. the marginal product of capital is positive. b. as the wage rises, the opportunity cost of leisure rises, so people work more. c. as the wage rises, people want to work less. d. the marginal product of labor is diminishing. e. None of these answers is correct.

The quote "Inflation is always and everywhere a monetary phenomenon" is attributed to: a. Alan Greenspan. b. Milton Friedman. c. Thomas Sargent. d. Karl Marx. e. David Ricardo.

The velocity of money can be calculated from the quantity equation with: a. Mt . b. PtYt /Mt . c. Mt /Pt Yt . d. PtYt . e. PtYt Mt .

When calculating fixed retirement payments, it is important not to forget: a. changes in flexible interest rates b. the decline in the payment's value due to inflation c. the increase in the payment's value due to inflation d. rates of return in other markets e. the price of tea in China

Which of the following is NOT an example of a short-term macroeconomic "shock"? a. a drought d. a change in the tax code b. planned investment expenditures e. political unrest c. increased military spending

b. You buy a used car from your parents.

According to the Solow model two countries will grow at different rates if:

both have different steady-state level of output and the same capital stock below the steady-state levelIf two countries have different steady-state levels of output and the same capital stock then through the process of transition dynamics the country with the higher steady-state level of output will grow faster as it tries to reach that higher steady state.

The law of diminishing marginal product to capital means that as we add additional units of capital:

but hold labor constant, output will increase but at a decreasing rate

The law of diminishing marginal product to capital means that as we add additional units of capital:

but hold labor constant, output will increase, but at a decreasing rate.

The U.S. trade deficit (according to many economists) is caused in part by

by foreign inflows of savings that is used to fund U.S. investment.

A drawback of unemployment benefits is that: a. the payments are too large. b. they cost taxpayers over 50 percent of their incomes. c. they give workers a disincentive to find work. d. they increase job destruction. e. they always lengthen the time spent unemployed.

A risk a bank takes on by offering long-term fixed interest rate loans is the: a. gains that could have been made if the money were invested in an alternative asset. b. gain that could be made from offering short-term loans. c. loss of real returns due to an unexpected inflation surprise. d. loss of customers wanting flexible interest loans. e. loss of real returns due to anticipated inflation.

According to the Phillips curve, short-term changes in inflation are due to changes in: a. interest rates d. long-term inflation b. unemployment e. long-term output c. short-term output fluctuations

According to the classical dichotomy, in the long run there is: a. accelerating economic growth b. perfect connectivity between the nominal and real sides of the economy c. complete separation of the nominal and real sides of the economy d. no growth after the economy reaches the steady state e. zero inflation

According to the government's budget constraint, if the government spends more than it generates in taxes, it can raise revenues by: a. decreasing its debt. b. privatizing. c. printing money. d. lowering interest rates. e. increasing interest rates.

According to the quantity equation, the cure for hyperinflation is: a. higher taxes d. All of these answers are correct. b. reducing government spending e. None of these answers are correct. c. reducing money growth

Any institutional fixed wage set above the equilibrium wage is called: a. the market wage. b. a real rigidity. c. a minimum wage. d. a wage rigidity. e. a wage ceiling.

Consider Figure 5.4, which represents two countries, 1 and 2. Country ________ has a higher saving rate and will have a ________ steady state than the other country. a. 2; lower d. 1; lower b. 1; higher e. Not enough information is given. c. 2; higher

Consider Table 7.1. Between January 2012 and January 2013, the unemployment rate ________ and the labor participation rate ________ (rounded to 1 decimal point). a. rose; fell d. fell; fell b. rose; rose e. Not enough information is given. c. fell; was about the same

Consider the data in Table 7.2. Using the "bathtub model" of unemployment, in 2015 the natural rate of unemployment is: a. 19.6 percent d. 0.2 percent b. 10.0 percent e. 90.9 percent c. 9.1 percent

Considering the data in Table 4.1 (Homework 3/4), the explanation for the difference between the predicted and actual level of output is called ________. If you compare South Africa's observed and predicted output, this difference is equal to ________. a. labor's share of GDP; two-thirds b. Dirac's delta; 0.14 c. total factor productivity; 0.37 d. the Solow residual; 2.71 e. capital's share of GDP; one-third

Defining Y(t) as current output, Y(bar)(t) as potential output, and Y(~bar)(t) as short-run fluctuations, which of the following equations does the text use to measure the fluctuations component of output? c. Y(~bar)(t)=(Y(t)-Y(bar)(t))/Y(bar)(t)

Frictional unemployment is the unemployment that results from: a. workers losing jobs during recession b. workers losing jobs during seasonal changes c. workers changing jobs in a dynamic economy d. prevailing labor market institutions e. workers leaving the labor force

Historically, for most Americans, the length of unemployment is: a. usually more than one year d. indefinite b. usually more than three months e. less than one week c. usually less than three months

If a perfectly competitive market has market entry, economic profits are: a. zero. b. negative. c. positive. d. increasing fast.

If we define the saving rate as s(bar), output as F(Kt, L(bar)), and the depreciation rate as d(bar), and if s(bar)F(Kt, L(bar)) - d(bar)Kt = 0, the economy is: a. contracting b. growing c. at the steady state d. in its short-run equilibrium e. None of these answers are correct.

In 1960, the Phillipines had a per capita income ________ South Korea. In 2010, ________. a. higher than; this difference was even more pronounced b. lower than; per capita income was equal in both countries c. equal to; South Korea had relatively higher per capita income d. lower than; this situation had reversed e. higher than; this situation had reversed

In 1960, the Phillipines had a per capita income ________ South Korea. In 2010, ________. a. lower than; this situation had reversed b. lower than; per capita incom e was equal in both countries c. equal to; South Korea had relatively higher per capita income d. higher than; this situation had reversed e. higher than; this difference was even more pronounced

In 1979, the inflation rate reached about 14 percent, due in part to ________. The Board of Governors of the Federal Reserve under ________ decided to ________ interest rates, sending the economy into a ________. a. a fall in oil prices; Volcker; raise; recession b. an increase in consumer spending; Volcker; lower; recession c. an increase in oil prices; Volcker; raise; recession d. an increase in oil prices; Volcker; lower; boom e. a fall in oil prices; Greenspan; raise; recession

In Figure 5.3 (Homework 3/4), at K1, the difference between s(bar)Y and d(bar)K is ________ and the difference between Y and s(bar)Y is ________. a. depreciation; gross investment b. gross investment; consumption c. net investment; consumption d. output; consumption e. output; investment

In Romer's influential paper he divided the economic world into: a. resources and ideas d. utilities and objects b. objects and resources e. None of these answers are correct. c. objects and ideas

In Romer's influential paper he divided the economic world into: a. resources and ideas. b. objects and resources. c. objects and ideas. d. utilities and objects. e. None of these answers is correct.

In our balloon analogy, the skin of the balloon represents: a. total exports. b. the monetary base. c. real or potential GDP. d. the money supply.

In the Romer model, the growth rate of ideas, g(bar), is increasing in: a. the research share and the total population b. the knowledge efficiency parameter and the population growth rate c. the knowledge efficiency parameter, the research share, and the total population d. the knowledge efficiency parameter and the saving rate e. the fraction of labor in research and development and the saving rate

In the Solow model, if It>d(bar)Kt, the capital stock: a. declines b. stays the same c. grows d. Not enough information is given. e. None of these answers are correct.

In the Solow model, if L(t)>d(bar)K(t), the capital stock: a. declines d. Not enough information is given. b. stays the same e. None of these answers are correct. c. grows

In the Solow model, the steady-state level of output per worker is a function of: a. productivity and the initial capital stock b. the initial capital stock, productivity, and the depreciation rate c. productivity, the depreciation rate, and the saving rate d. the initial capital stock and the steady-state level of capital stock e. the initial capital stock, productivity, and the saving rate

In the corn farm example, corn can be used as: a. only consumption b. either saving or depreciation c. either consumption or investment d. only investment e. tax revenue

In the labor market depicted in Figure 7.3 (Homework 3/22), an increase in oil prices: a. shifts labor demand from LS 2 to LS 1. b. shifts labor supply from LS 2 to LS 1. c. shifts labor demand from LD 1 to LD 2. d. produces no change in either the labor supply or demand curve. e. None of these answers is correct.

Inflation is calculated as: a. the overall price level d. the difference in the price level b. the rate of change of the price level e. the percent change in output c. the percent change in the price level

John Maynard Keynes is famous for saying, "In the long run ________." a. we will tear down this wall b. the only thing we have to fear is fear itself c. we are all dead d. the study of economics will be redundant e. there is no tomorrow

Keynesian (original school) economists argue: a. velocity is unstable. b. monetary policy is a weak policy tool. c. all of the answers are true. d. monetary policy can influence real output in the long-run.

Nonrivalry in the knowledge sector means that: a. per capita income depends on the total population b. per capita income depends on some of the stock of ideas c. per capita income depends on the total stock of ideas d. labor in the ideas sector also can be used in the output sector e. all labor is used in the ideas sector

One explanation for the difference between the predicted output per person and the observed per capita GDP in Table 4.1 is differences in: a. per capita capital. b. the labor supply. c. factor productivity. d. labor's share of GDP. e. None of these answers is correct.

Perfectly competitive firms typically have _________ fixed costs. a. zero b. very high and rising c. low d. high

The amount of raw material in the universe—the amount of sand, oil, and the number of atoms of carbon, oxygen, etc.—is ________. The number of ways of arranging and using these raw materials is ________. a. finite; also finite d. virtually infinite; zero b. infinite; virtually infinite e. zero; infinite c. finite; virtually infinite

The data presented in Figure 8.1 (Homework 3/31) confirm that the relationship between inflation and money growth is ________, as suggested by ________. a. positive; the Fisher equation b. positive; money neutrality c. positive; the quantity theory of money d. negative; the quantity theory of money e. None of these answers is correct.

The endogenous variables in the Solow model are: a. the capital stock, labor, and output b. consumption, investment, the capital stock, labor, and the saving rate c. consumption, investment, the capital stock, labor, and output d. productivity and the depreciation and saving rates e. the capital stock, labor, output, and the saving rate

The equation s(bar)F(K(t),L(bar)-d(bar)K(t) is called: a. saving d. the capital stock b. investment e. depreciation c. net investment

The essence of the quantity theory of money is that: a. only the central bank knows what the price level is. b. in the long run, the only determinant of the price level is the interest rate. c. in the long run, a key determinant of the price level is the money supply. d. money cannot pin down the price level. e. the price level is indeterminate.

The essence of the quantity theory of money is that: a. the price level is indeterminate b. in the long run, the only determinant of the price level is the money supply c. in the long run, a key determinant of the price level is the money supply d. only the central bank knows what the price level is e. money cannot pin down the price level

The implications of the quantity theory of money are the main basis for which of the following quotes? a. "Inflation is always zero in the long run." b. "Inflation is always and everywhere a fiscal phenomenon." c. "Inflation is always and everywhere a monetary phenomenon." d. "Velocity growth should be equal to 2 percent in the long run." e. "Velocity is always constant."

The labor demand curve slopes downward because: a. wages are inflexible b. wages are higher when demand falls c. of the diminishing marginal product of labor d. of the income effect e. None of these answers are correct.

The labor demand curve slopes downward because: a. wages are inflexible. b. wages are higher when demand falls. c. of the diminishing marginal product of labor. d. of the income effect. e. None of these answers is correct.

The quote "Inflation is always and everywhere a monetary phenomenon" is attributed to: a. Karl Marx d. Alan Greenspan b. Thomas Sargent e. David Ricardo c. Milton Friedman

The right to seignorage is the right to: a. make coins d. borrow from the public b. raise tax revenues e. raise an army c. print money

The right to seignorage is the right to: a. make coins. b. raise tax revenues. c. print money. d. borrow from the public. e. raise an army.

The rise in the employment-population ratio largely is due to: a. a shrinking U.S. population b. more teenagers entering the labor force c. more women entering the labor force d. an increase in immigrant workers e. It is unexplained.

The short-run model determines ________ and ________. a. potential output; unemployment b. current output; long-run inflation c. current output; current inflation d. unemployment; current inflation e. unemployment; potential output

The unemployment rate is defined as the ratio of: a. all adults not working to the total population. b. discouraged workers to the total population. c. unemployed members of the labor force to the total labor force. d. unemployed members of the labor force to the total population. e. unemployed to employed members of the labor force.

The unemployment rate is defined as: a. the ratio of all adults not working to the total population b. the ratio of unemployed to employed members of the labor force c. the ratio of unemployed members of the labor force to the total labor force d. the ratio of discouraged workers to the total population e. the ratio of unemployed members of the labor force to the total population

The velocity of money is: a. how quickly money can be printed b. how quickly individuals spend their income c. the average number of times a dollar is used in a transaction per year d. how many times individuals are paid per year e. None of these answers are correct.

The velocity of money is: a. how quickly money can be printed. b. how quickly individuals spend their incomes. c. the average number of times a dollar is used in a transaction per year. d. how many times individuals are paid per year. e. None of these answers is correct.

Using the quantity equation, if, Mt= $1,000, Pt=1.1, and Yt= 100,000, then the velocity of money is: a. 100,000 d. 9.09 b. 0.09 e. 0.11 c. 110

When inflation is high and people are forced to make more trips to the bank, this is often referred to as: a. marginal social cost. b. the neutrality of money. c. shoe-leather costs. d. hyperinflation. e. the double coincidence of wants.

Which of the following flowcharts best summarizes Romer's description of ideas and growth? a. Capital → Nonrivalry → Decreasing returns → Imperfect competition b. Capital → Rivalry → Increasing returns → Perfect competition c. Ideas → Nonrivalry → Increasing returns → Imperfect competition d. Ideas → Capital → Constant returns → Imperfect competition e. Ideas → Rivalry → Increasing returns → Perfect competition

Which of the following has NO effect on long-run economic growth? a. population b. institutions c. money d. investment e. productivity

With monopolistic pricing, ________ are needed to generate ________. a. profits; capital b. costs; capital c. profits; new ideas d. variable costs; total factor productivity e. profits; total factor productivity

With unanticipated inflation: a. debtors with an unindexed contract lose, because they pay exactly what they contracted for in nominal terms. b. debtors with an indexed contract are hurt, because they pay more than they contracted for in real terms. c. creditors are hurt unless they have an indexed contract, because they get less than they expected in real terms. d. creditors with indexed contracts gain, because they receive more than they contracted for in nominal terms. e. debtors with an indexed contract are hurt, because they pay more than they contracted for in nominal terms.

________ prevent(s) governments from being tempted to use seignorage excessively. a. Gold reserves b. The power of bond markets c. Central bank independence d. The government budget constraint e. Future generations

Current output is defined as: a. what an economy produces when it is at capacity. b. the amount of total output if all inputs are utilized at their long-run sustainable levels. c. the amount of output when inflation is about 2 percent. d. the amount of total output at the current level of input utilization. e. the amount of output where unemployment is zero.

If East and West Timor are identical in every way except that East Timor has fewer researchers: a. West and East Timor will grow at the same rate b. East Timor should grow faster according to the Romer model c. West Timor should grow faster according to the Solow model d. West Timor should grow faster according to the Romer model e. East Timor is smaller than West Timor

If a firm is making a normal profit, economic profits are: a. increasing fast. b. negative. c. positive. d. zero.

If current output is Y(t)=$12 billion and potential output Y(bar)(t)=$11.25 billion, then the economy is in a ________ and Y(~bar)(t) is about ________. a. boom; -6.7percent d. boom; 6.7 percent b. recession; -6.7 percent e. None of these answers are correct. c. recession; -6.2 percent

If the income taxes on wages increase, the labor supply curve will shift left, but what happens to the unemployment rate? a. It unambiguously falls because the labor participation rate changes. b. It unambiguously falls because some workers drop out of the workforce. c. It unambiguously rises because some workers drop out of the workforce. d. It is ambiguous because some workers drop out of the workforce. e. None of these answers is correct.

If the real GDP growth is 4 percent per year, the money growth rate is 6 percent, and velocity is constant, using the quantity theory, the inflation rate is: a. 6 percent d. 2 percent b. 4 percent e. -4 percent c. -2 percent

In perfect competition, the price is ________; in a monopoly, the price is ________.

equal to the marginal cost; greater than the marginal cost

If there are large fixed costs due to research and development, perfect competition does not generate new ideas because: a. with monopolistic competition, prices are equal to the marginal cost. b. with monopolistic competition, prices are equal to the marginal cost minus a markup. c. perfectly competitive firms always set prices lower than the marginal cost. d. firms need to recoup these costs through higher profits. e. the government does not adequately fund innovation.

If you decide to buy a house with an adjustable-rate mortgage (ARM), you are: a. reducing your inflation risk. b. passing inflation risk to the lender. c. taking on some of the lender's inflation risk. d. exposing yourself to inflation risk. e. increasing your mortgage payment.

In Figure 5.1 (Homework 3/4), if the economy begins with the initial capital stock at K 1, the capital stock will ________ and the economy will ________. a. stay constant; grow b. stay constant; shrink c. decrease; grow d. increase; grow e. decrease; shrink

In Figure 5.3, at K2, capital accumulation is ________, the economy is ________, and consumption is________. a. positive; growing; positive d. zero; in the steady state; positive b. zero; in the steady state; zero e. zero; contracting; negative c. negative; growing; positive

In economics, a rival good is one that: a. cannot be consumed by more than two people at a time. b. can be consumed by more than one person at a time. c. is congested if used by more than one person at a time. d. cannot be consumed by more than one person at a time. e. None of these answers is correct.

In growth accounting, the residual, g(A), is so named because: a. the economy is complicated b. economists know exactly what contributes to growth c. it is a way to measure observed TFP growth d. it is a way to measure unobserved TFP growth e. it measures labor composition

In the Romer model, if Canada and Taiwan have the same fraction of researchers and the same knowledge efficiency parameter but Canada's population is larger, then: a. Taiwan has a higher per capita output growth rate. b. each country's per capita output grows at the same rate. c. Canada's level of income is greater than Taiwan's. d. Canada has a higher per capita output growth rate. e. Canada has higher per capita income than Taiwan.

In the Romer model, if an economy allocates all of its labor to production: a. it will reduce output b. it will reduce the number of ideas it generates c. it will increase the number of ideas it generates d. it will not generate any ideas e. None of these answers are correct.

In the Romer model, if an economy's share of researchers decreases, there will be: a. no change in output but output growth will slow. b. an immediate decrease in output and output growth will slow. c. an immediate decrease in output and output growth will accelerate. d. an immediate increase in output and output growth will slow. e. an immediate increase in output and output growth will accelerate.

In the Solow model, if net investment is positive: a. savings are negative b. capital accumulation is negative c. capital accumulation is zero d. capital accumulation is positive e. Not enough information is given.

In the Solow model, it is assumed a(n) ________ fraction of capital depreciates each period. a. zero d. constant b. increasing e. None of these answers are correct. c. decreasing

In the Solow model, the parameter d(bar) denotes ________ and is ________. a. investment; less than one d. the depreciation rate; less than one b. the depreciation rate; equal to zero e. investment; greater than one c. consumption; greater than one

In the United States, money is backed by: a. oil d. no physical commodity b. gold e. None of these answers are correct. c. silver

In the labor market depicted in Figure 7.3, investment in new physical capital: a. shifts labor supply from LS1 to LS2 b. shifts labor supply from LS2 to LS1 c. shifts labor demand from LD1 to LD2 d. shifts labor demand from LD2 to LD1 e. None of these answers are correct.

In the quantity theory of money, the: a. price level is exogenous b. real GDP, velocity, and money supply are endogenous c. real GDP and money supply are endogenous d. real GDP, velocity, and money supply are exogenous e. real GDP is endogenous

Over the past 50 years or so: a. the employment-population ratio always has been rising b. the employment-population ratio generally has been falling c. the unemployment-population ratio generally has been rising d. the employment-population ratio generally has been rising e. None of these answers are correct.

Per class discussion, the most common barrier to entry for oligopolies are: a. excess profits. b. variable costs of production. c. government protection. d. economies of scale.

Potential output is defined as: a. the level of output when unemployment is 10 percent. b. the amount of output where inflation is zero. c. the current level of output. d. the amount of total output if all inputs were utilized at their long-run, sustainable levels (i.e. long-run maximum sustainable level of output). e. what an economy produces when it is booming.

The Solow model assumes: a. the depreciation rate changes each period b. the number of workers is growing c. the saving rate changes each period d. the number of workers is constant e. the capital stock is constant

The long-run model determines ________ output and ________. a. current; unemployment b. potential; potential inflation c. current; long-run inflation d. potential; long-run inflation e. potential; unemployment

The measure of money that includes demand deposits and currency only is called: a. M0 d. M1 b. MZ e. MB c. M2

The natural rate of unemployment is decomposed into ________ unemployment. a. structural, frictional, and seasonal b. structural and seasonal c. cyclical and frictional d. structural and frictional e. seasonal and frictional

The production function in the Romer model is given by ________, where is ________. a.; the growth rate of capital b.; the growth rate of knowledge c.; the growth rate of population d. y=A(bar)(0)(1-L(bar))(1+g(bar))^t; the growth rate of knowledge e.; the growth rate of population

Using Figure 7.1 (Homework 3/22), Which of the following year(s) are the approximate trough of a recession? a. 1975 b. 1983 c. 2011 d. All of these answers are correct. e. None of these answers is correct.

Using Figure 7.1, which of the following year(s) are t he trough of a recession? a. 1975 d. All of these answers are correct. b. 1983 e. None of these answers are correct. c. 1992

Using the Solow model, if, in time t = 0, the initial capital stock is K0 = 100, investment is I0 = 25, and d(bar) is the depreciation rate, capital accumulation is: (see pg. 105 text): a. change in K0 = 35 b. change in K0 = 115 c. change in K0 = -15 d. change in K0 = 15 e. change in K0 = 0

Using the quantity equation, if Mt = $1,000, Pt = 1.1, and Yt = 100,000, then the velocity of money is: a. 0.09. b. 100,000. c. 0.11. d. 110. e. 9.09.

With the production function Y(t)=A(t)K(t)^(1/3)L(t)^(2/3) , if we double ________, we have a constant returns production. a. capital d. capital and labor b. capital, labor, and the stock of ideas e. labor and the stock of ideas c. capital and the stock of ideas

With the production function Y(t)=A(t)K(t)^(1/3)L(t)^(2/3) , if we double ________, we have an increasing returns production. a. capital d. capital, labor, and the stock of ideas b. capital and the stock of ideas e. labor and the stock of ideas c. capital and labor

According to the U6 unemployment: a. it includes both recent job losers and long-term unemployment. b. it includes marginally attached workers. c. the measure includes U5 plus part-time workers seeking full-time work. d. the magnitude is approximately double the U3 measure of unemployment. e. all of the answers are correct.

Because there are no diminishing returns in the stock of ideas in the Romer model: a. old ideas continue to contribute to current economic growth b. economic growth cannot be sustained forever c. the economy eventually reaches a steady state d. economic growth eventually slows e. new ideas must be continually created

Consider Table 7.1 (Homework 3/22). In 2010, the employment-population ratio was ________ percent. a. 64.7 b. 90.4 c. 9.6 d. 60.2 e. 58.5

Consider Table 7.1 (Homework 3/22). In 2010, the unemployment rate was ________ percent. a. 50.1 b. 6.2 c. 39.8 d. 10.6 e. 9.6

Defining Yt as current output, Y(bar) as potential output, and ~Y as short-run fluctuations, which of the following equations is correct? a. Yt = ~Y - Y(bar) b. Y(bar) = ~Y c. Yt = ~Y/Y(bar) d. Yt = 0 e. Yt = Y(bar) + ~Y

Europe's relatively high unemployment rates can be attributed to: a. adverse shocks. b. inefficient labor market institutions. c. strong labor unions. d. generous unemployment insurance. e. All of these answers are correct.

For which of the following does the Solow model NOT provide adequate explanations? a. why saving rates differ across countries b. the cause of productivity differences across countries c. why population growth rates differ across countries d. what causes long-term economic growth e. All of these answers are correct.

Frictional unemployment is the unemployment that results from: a. prevailing labor market institutions. b. workers leaving the labor force. c. workers losing jobs during recession. d. workers losing jobs during seasonal changes. e. workers changing jobs in a dynamic economy.

The Solow model of economic growth:

endogenizes physical capital

If P(t) is the price level in time t, inflation is calculated as: a. 1/P(t) b. P(t+1)/P(t) c. P(t+1)-P(t) d. P(t)/P(t+1) e. (P(t+1)-P(t)/P(t)

If the minimum wage is set above the equilibrium market wage, it: a. does not affect the market equilibrium. b. equals the black market wage. c. is effective and reduces unemployment. d. is lower than firms are willing to pay for labor. e. increases unemployment.

If the real GDP growth is 4 percent per year, the money growth rate is 6 percent, and velocity is constant, using the quantity theory, the inflation rate is ________ percent. a. −2 b. 6 c. −4 d. 4 e. 2

If there are large fixed or research and development costs, such as in the pharmaceutical industry, production can be characterized by: a. negative costs d. large variable costs b. constant returns to scale e. increasing returns to scale c. decreasing returns to scale

In Figure 5.1 (Homework 3/4), the capital stock at K 1 is not the steady state because: a. the saving rate is too high b. gross investment is lower than capital depreciation c. the saving rate is too low d. the depreciation rate is too low e. gross investment is higher than capital depreciation

In the Romer model, if an economy's population increases: a. output growth decelerates b. output immediately increases and output growth slows c. output immediately decreases and output growth slows d. output immediately decreases and output growth accelerates e. output growth accelerates

In the Solow model, if, in the absence of any shocks, the capital stock remains at K* forever, this rest point is called the: a. dynamic system b. the rate of capital accumulation c. short-run equilibrium d. saving rate e. steady state

Increasing returns to scale is characterized by: a. constantly declining fixed costs b. diseconomies of scale; that is, the average cost falls as output rises c. economies of scale; that is, the average cost rises as output rises d. diseconomies of scale; that is, the average cost is constant as output rises e. economies of scale; that is, the average cost falls as output rises

One explanation for the difference between the predicted output per person and the observed per capita GDP in Table 4.1 (Homework 3/4) is differences in: a. per capita capital. b. labor's share of GDP. c. the labor supply. d. capital's share of GDP. e. the state of technology.

Structural unemployment is the unemployment that results from: a. workers leaving the labor force b. workers changing jobs in a dynamic economy c. workers losing jobs during seasonal changes d. workers losing jobs during recession e. prevailing labor market institutions

Suppose the parameters of the Romer model take the following values: A(bar) = 10, l(bar) = 0.01, z(bar) = 1/500 and L(bar) = 10,000. What is the per capita income of this country in the first period, y1? a. about 9.9 b. about 1.19 c. about 12.0 d. about 14.3 e. about 11.9

The Great Depression stimulated ________ to write ________, which is considered to be the birth of modern macroeconomics. a. John Hicks; Value and Capital b. Karl Marx; Das Kapital c. David Ricardo; Principles of Political Economy and Taxation d. Milton Friedman and Anna J. Schwartz; A Monetary History of the United States, 1867-1960 e. John Maynard Keyes; The General Theory of Employment, Interest, and Money

The Solow model describes: a. how savings, population growth, and technological change affect output in a single period b. what constitutes technological change c. the static relationship between capital and output d. how saving rates are determined e. how savings, population growth, and technological change affect output over time

The equation s(bar)F(Kt - L(bar)) - d(bar)Kt, is called: a. investment b. the capital stock c. saving d. depreciation e. net investment

The key insight in the Solow model is that: a. saving rates are determined in a particular manner b. savings have no impact on economic growth c. capital depreciation enhances economic growth d. the relationship between capital and output is static e. capital accumulation contributes to economic growth

The labor market determines: a. the equilibrium wage b. the equilibrium quantity of employment c. the equilibrium wage and the quantity of employment d. the number of unemployed e. All of these answers are correct.

Increasing returns to scale is characterized by:

economies of scale; that is, the average cost falls as output rises.

In the corn farm example, corn can be used as:

either consumption or investment.

The inflation tax will affect an individual who holds all his assets in artwork.

false Pages 221-222. Holders of currency only pay the inflation tax. Because all prices in the economy are influenced by the inflation tax, the value of the artwork changes proportionately with all other prices.

In the Romer model, the more labor you dedicate to generating ideas, the ________ but ________.

faster you accumulate knowledge; at a loss to current output in the consumption sector

Money that has no intrinsic value except as money is called ________ money.

fiat

If MPL < w, the firm should...

fire some labor until MPL = w.

If there are large fixed costs due to research and development, perfect competition does not generate new ideas because:

firms need to recoup these costs through higher profits.

Capital accumulation is a(n):

flow

In the United States, most of the natural rate of unemployment is

frictional

Defining per capita GDP in 2016 as y2016 and per capita GDP in 2015 as y2015, the growth rate of per capita GDP, g, from 2015 to 2016 is given by:

g = y2016 - y2015/ y2015 .

What are the 2 ways of expressing Percentage change in GDP between period t and t + 1 ?

g-bar = (Yt+1 - Yt) / Yt or Yt+1 = Yt(1 + g-bar)

What is the balanced growth path in the Romer model?

gY = gA

In the Romer model, what is the growth rate of technology?

gbar = zbarlbarLbar

Suppose k, l, and m grow at constant rates given by gk , gl , and gm.What is the growth rate of y if y (mkl) 1/3?

gy=(1/3)gm+(1/3)gk+(1/3)gl

Define and explain Growth rate in the Romer model...

gbar = zbarlbarLbar Where zbar = how efficiently researchers can use the old stock of ideas lbar = the fraction of the workforce devoted to creating ideas rather than creating goods Lbar = the size of the overall labor force Basically means that a More efficient idea creation, a larger fraction of workers searching for ideas, or more workers in the first place would increase the economy's overall growth rate.

Frictional Unemployment

good kind, from people switching jobs

Immediately following the increase in the saving rate, output grows rapidly. As the economy approaches its new steady state, the growth rate:

gradually declines.

In the Solow model, if investment is ________ depreciation, the capital stock ________.

greater than; grows

In the Solow model, if investment is ________ depreciation, the capital stock ________.

greater than; grows

If the percent change in the price level is ________ than the percent change in ________, ________.

greater; nominal GDP; real GDP shrinks

In Figure 5.1, the capital stock at K1 is not the steady state because:

gross investment is higher than capital depreciation.

In the Solow model, if It>dKt, the capital stock:

grows

In the Romer model, output is increasing in the ________ and decreasing in the ________.

growth rate of knowledge; fraction of population in the ideas sector

A balanced growth path is defined as a situation in which the:

growth rates of all endogenous variables are constant.

A country experiencing a hyperinflation is likely to:

have another hyperinflation after the current problem is solved. Pages 223-224. Hyperinflations are usually a recurring phenomenon because it is difficult to end a hyperinflation. Fiscal stability is not easily restored and coordination problems not easily overcome.

According to the Solow model, in the steady state, countries with high saving rates should have a:

high capital-output ratio

According to the Solow model, in the steady state, countries with high saving rates should have a...

high capital-output ratio.

According to the Solow model, in the steady state, countries with high saving rates should have a:

high capital-output ratio.

Because in many industries the cost of generating new ideas is so high, firms must charge a price ________ cost.

higher than the marginal cost

If MPK > r, the firm should....

hire more capital until MPK = r.

Liquidity is a measure of

how quickly an asset can be converted to currency.

If the price level in year 1 was equal to 100 and the price level in year 2 was equal to 1,000, in year 2 the country is experiencing

hyperinflation

If the price level in year 1 was equal to 100 and the price level in year 2 was equal to 1,000, in year 2 the country is experiencing:

hyperinflation ages 206-207. The inflation rate is measured with the annual percentage change in the price level . In this case, the inflation rate is 900%. An episode of extremely high inflation is known as hyperinflation.

Let R denote the real interest rate and i denote the nominal interest rate; these two interest rates are related by

i=R+pi.

In Figure 5.1, if the economy begins with the initial capital stock at K1, the capital stock will ________ and the economy will ________.

increase; grow

One reason for the larger trade deficit in the last several decades is:

increased consumption

Inflation ________ price volatility and ________ allocative efficiency

increases; decreases

If there are large fixed or research and development costs, such as in the pharmaceutical industry, production can be characterized by...

increasing returns to scale

If there are large fixed or research and development costs, such as in the pharmaceutical industry, production can be characterized by:

increasing returns to scale

Nonrivalry of ideas and the standard replication argument imply the production function will have

increasing returns to scale. FEEDBACK: Pages 142-143. The standard replication argument implies we can double output by doubling objects, but ideas are nonrivalrous and can be used in two duplicate factories simultaneously.

Consider an economy described by the textbook Solow model with a production function. The economy is producing 100 units of output and the productivity parameter is equal to 1. If the depreciation rate is 6%, the investment rate is 6%, and there are 125 workers, the growth rate of the economy_____:

is positive because the economy is below its steady state. Replace the given numbers in equation 5.7 and solve for the steady state level of capital: K = 125. Therefore, Y = 5 * 25 = 125. If the economy currently produces 100 units of output according to the Solow diagram it is below its steady state and the growth rate of the economy is positive

In the Solow model, in every period, a fraction of total output , ________ which ________ next period's capital stock.

is saved; adds to

In the Solow model, in every period, a fraction of total output ________, which ________ next period's capital stock.

is saved; adds to

How is a variable denoted as being exogenous?

it has a bar on top

When interpreting the solution to the Cobb-Douglas Production Function, what can be said about The equilibrium wage?

it is proportional to output per worker Output per worker = (Y/L)

Suppose that in 1955 Japan had an initial per capita GDP of $15,000 per year and China had a per capita GDP of $2,500. But China is growing at 7 percent per year and Japan is growing at 2 percent per year. In 2015, ________ would have been the lower-income country, with a per capita GDP of approximately ________.

japan;$49,000 Japan 15(1.020)^60=49 China 2.5(1.07)^60=145

In the Romer model, the growth rate of ideas, , is increasing in the:

knowledge efficiency parameter, the research share, and the total population

In the simple Solow model, we assume:

labor is exogenous.

In the Solow model, saving and investing in additional factories and computers does ________ output to grow in the ________ run if the economy is below Y*. But, in the long run, the ________ returns to capital accumulation lead the return to these investments to fall.

lead; medium; diminishing

The wholesale price of one pound of coffee was 8.25 cents in 1900 and $1.50 in 2015. If the CPI was 3.43 for 1900 and 100 for 2015, coffee was

less expensive in 2015 compared to 1900. Pages 208-209. We can find the equivalent 2015 value of the 1900 price using the equation: value in 1900* (CPI2015/CPI1900). Thus, the equivalent 2015 value of $0.0825 is $2.41, which makes coffee less expensive in 2015. FEEDBACK: Pages 208-209. We can find the equivalent 2015 value of the 1900 price using the equation: value in 1900*(CPI2015/CPI1900). Thus, the equivalent 2015 value of $0.0825 is $2.41, which makes coffee less expensive in 2015.

An implication of the Solow model is that once an economy reaches the steady state:

long-term growth does not continue

An implication of the Solow model is that once an economy reaches the steady state:

long-term growth does not continue.

How should resources be allocated in the Cobb-Douglas Production Function? And what does this mean?

maxπ = F(K,L) - rK - wL π: profits r: rental rate of capital w: wage rate Hire capital until the MPK = r Hire labour until MPL = w

Which of the following has NO effect on long-run economic growth?

money

Which of the following has NO effect on long-run economic growth in the long-run according to the classical school?

money.

On average, if both rich and poor countries grow at the same rate, this suggests that:

most countries have reached their steady states

Consider the Solow model exhibited in Figure 5.4. If a country's saving rate increases from s1 to s2, the economy would:

move from point a to point b.

In the Solow model, if a country's saving rate increases, the country:

moves from a relatively low steady state to one that is higher.

In the standard production model's production function, the productivity parameter enters the equation with an exponent of one, while in the Solow model's equation for the steady-state stock of capital it is greater than one because:

the endogenous level of the capital stock itself depends on productivity.

Consider the following model of the labor market: • Labour supply: Ls = abar × w + lbar, • Labour demand: Ld = fbar − w. Endogenous variables are...

the equilibrium quantity of labor, L*, and wage, w*

The Cobb-Douglas Production Function has diminishing returns as...

the function is globally convex. We can also see this algebraically when taking the 2nd derivative with respect to both L and K and see that they are both < 0

The principle of transition dynamics can be summarized as...

the further below its steady state an economy is, the faster the economy will grow.

The principle of transition dynamics can be summarized as:

the further below its steady state an economy is, the faster the economy will grow.

How quickly GDP doubles will depend on:

the growth rate of GDP

The nominal interest rate is

the interest rate not adjusted for inflation. the "advertised" interest rate. a description of the return in units of currency. *All of these answers are correct

The nominal interest rate is...

the interest rate on a savings account and Is paid in dollars

If South Korea's steady-state GDP per worker is higher than that of the Philippines, you might conclude that ________, ceteris paribus.

the investment rate in South Korea is higher than in the Philippines

Which of the following do(es) NOT explain differences in total factor productivity?

the labor stock

Imagine a two-good economy where the quantity of the goods produced is unchanged over time, but where prices have increased. Then, in the most recent year, real GDP will be

the largest number when using the Paasche index.

the same steady-state level of output as it would have before the disaster

the same steady-state level of output as it would have before the disaster.

An increase in ________ leads to a higher steady-state capital stock, and a decline in ________ leads to a lower steady-state capital stock.

the saving rate; productivity

. An increase in ________ leads to a higher steady-state level of output, and an increase in ________ leads to a lower steady-state level of output.

the saving rate; the depreciation rate

An increase in ________ leads to a higher steady-state level of output, and an increase in ________ leads to a lower steady-state level of output.

the saving rate; the depreciation rate

Keynesian economists believe that consumers have money illusion, that is

they act on changes in nominal variables instead of real variables.

An example of a good that is both non-rivalrous and excludable is

the source code for Microsoft Word. FEEDBACK: Page 140. Nonrivalry implies one person's use of a good does not reduce the usefulness to someone else. The park is rivalrous because you may go there to enjoy quiet, but if it is crowded and no park benches are available, the park has become less useful to you. Excludability is a restriction on the use of a particular idea. While, in principle, multiple consumers can use the same piece of software, access may be restricted by a license purchase requirement, for instance.

To get increasing returns to scale using the production function, Yt = A Kt^1/3 Lt^1/3 we need to replace total factor productivity with:

the stock of ideas, At

In the Romer model, Output per person depends on...

the stock of knowledge yt ≡ Yt/Lbar = At(1-lbar)

What does UK GDP per person measure?

the total output of the UK's economy, divided by the country's population.

The birthplace of modern economic growth was in ________ during the ________ century.

the united kingdom; mid eighteenth

If labor supply increases, holding demand constant, what happens to wage?

the wage falls and the employment-population ratio rises

With an inflation tax

there is a redistribution of income from income earners to owners of real assets

Suppose we compare GDP per person in Uganda and the United States in two ways: first using the exchange rate method and second using the relative price-based conversion as well. Then, Uganda appears to be richer under the relative price-based conversion than with the exchange rate conversion.

true

The classical school does not believe in money illusion.

true

The monetary base equals bank reserves and currency in circulation.

true

Until 1970, labor's share of GDP has been relatively stable at approximately two-thirds of GDP.

true

You plot the production function for the United States on a graph with output per person on the vertical axis and capital per person on the horizontal axis. If a shock occurs causing the productivity parameter to increase, the production function would shift upward.

true

The monetary base contains elements that are more liquid than M2.

true Page 210. The broader measures of the money supply (M2 is broader than the monetary base) contain accounts that are less liquid. Thus, the monetary base is more liquid.

If real GDP is growing at a rate of 2 percent, the central bank should grow the money supply at a rate of 2 percent to keep prices unchanged.

true Page 213. Prices are stable if the inflation rate is 0 percent and this occurs when the growth rate in the money supply is equal to the growth rate of real output.

If the real interest rate is 3 percent and the nominal interest rate is 1 percent then the economy is experiencing deflation according to the Fisher equation.

true Page 216. The inflation rate is equal to the nominal interest rate minus the real interest rate, which is negative in this example.

If we define sbar1 and sbar2 as the saving rates in Countries 1 and 2, respectively, dbar1 = dbar2 as the depreciation rates in Countries 1 and 2, respectively, and Abar1 and Abar2 as productivity in Countries 1 and 2, respectively, in the Solow model, the equation ________ predicts that ________ differences contribute the most to differences in steady-state output per worker.

y*1/y*2 = (Abar1/Abar2)^1.5 x (sbar1/sbar2)^0.5 productivity

According to the constant growth rate rule, if a variable starts at some initial value y0 at t 0 and grows at yt y0(1g) t at a constant rate g, then the value of the variable in three periods is given by:

y3 = y0(1+g)^ 3 .

Find output per person in the Romer model.

yt = At(1 - l)

In the Romer model, Combining the equations for the stock of knowledge and output per capita, it is possible to formulate an expression of output per person in terms of the parameters of the model. Show this.

yt = A₀(1-lbar)(1+gbar)^t

What is the constant growth rule?

yt = y0(1 + g)^t

What is the equation for growth rates of products?

z = (x)(y) gz = gx + gy

What is the equation for growth rates of ratios?

z = x/y gz = gx - gy

What is the equation for growth rates of powers?

z = x^a gz = (a)(gx)

What are the parameters in the Romer model?

z, L, l, A0

In models with perfect competition, economic profits are...

zero

The steady state is defined as the point where capital accumulation, ΔKt+1, is equal to:

zero

The steady state is defined as the point where capital accumulation, ΔKt, is equal to:

zero

The steady state is defined as the point where capital accumulation, ΔKt, is equal to:

zero.

In Figure 5.3, at K2, capital accumulation is ________, the economy is ________, and consumption is ________.

Macro Final 4

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