Macro final set
In the Keynesian-cross model, actual expenditures equal:
GDP
Conducting monetary policy so that the federal funds rate = π + 0.5(π - 2) + 0.5 (GDP gap), where the federal funds rate is the nominal federal funds interest rate, π is the annual inflation rate, and GDP gap is the percentage shortfall of real GDP from its natural level, is an example of:
an active policy rule.
International differences in income per person in accounting terms must be attributed to differences in ______ and/or ______.
factor accumulation; production efficiency
Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a multi-period positive demand shock, output _____, and inflation _____.
increases; increases
If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:
level of output but not prices.
Advocates of passive policy argue that because monetary and fiscal policy lags are:
long and variable, these policies should not be used to offset shocks.
Okun's Law
1 percent more unemployment results in 2 percent less output
AS-AD shifts: Cost-push inflation would shift which line upward?
AS
Starting from long-run equilibrium at A with output equal to Y and the price level equal to P1, a cost-push inflation would be represented by a shift from:
AS1 to AS2
Many people are concerned about the budget deficit of the U.S. federal government. Suggest at least three possible negative economic effects of a budget deficit and three possible economic benefits of a budget deficit.
As traders, investors, and creditors become increasingly concerned that the government would resort to high inflation to reduce the real value of government debt or that a fiscal deadlock with unpredictable consequences would arise, investor confidence may be severely undermined;The fiscal and current account imbalances may also cause a loss of confidence among participants in foreign exchange markets and in international credit markets, as participants in those markets become alarmed not only by the ongoing budget deficits but also by related large current account deficits;The loss of investor and creditor confidence, both at home and abroad, may cause investors and creditors to reallocate funds away from dollar-based investments, causing a depreciation of the exchange rate, and to demand sharply higher interest rates on U.S. government debt;The increase of interest rates, depreciation of the exchange rate, and decline in confidence can reduce stock prices and household wealth, raise the costs of financing to business, and reduce private-sector domestic spending;The disruptions to financial markets may impede the intermediation between lenders and borrowers that is vital to modern economies, as long-maturity credit markets witness potentially substantial increases in interest rates and become relatively illiquid, and the reduction in asset prices adversely affects the balance sheets of banks and other financial intermediaries;The inability of the federal government to restore fiscal balance may directly reduce business and consumer confidence, as the view of the ongoing deficits as a symbol of the nation's inability to address its economic problems permeates society, and the reduction in confidence can discourage investment and real economic activity;These various effects can feed on each other to create a mutually reinforcing cycle; for example, increased interest rates and diminished economic activity may further worsen the fiscal imbalance, which can then cause a further loss of confidence and potentially spark another round of negative feedback effects.Although it is impossible to know at what point market expectations about the nation's large projected fiscal imbalance could trigger these types of dynamics, the harmful impacts on the economy, once these effects were in motion, would substantially magnify the costs associated with any given underlying budget deficit and depress economic activity much more than the conventional analysis would suggest. Indeed, the potential costs and fallout from such fiscal and financial disarray provide perhaps the strongest motivation for avoiding substantial, ongoing budget deficits. budget deficit can have positive macroeconomic effects in the long run if it is used to finance extra capital spending that leads to an increase in the stock of national assets. For example, higher spending on the transport infrastructure improves the supply-side capacity of the economy promoting long-run growth. And increased public-sector investment in health and education can bring positive effects on labour productivity and employment. The social benefits of increased capital spending can be estimated through use of cost-benefit analysis.
The Golden Rule level of steady-state investment per worker is:
BC.
If there are no unexpected changes in money supply in an economy, can there still be unexpected inflation in the economy?
Yes, price level can change in response to shocks to production factors, therefore causing inflation.
Which of the following would be represented by a negative value of the random demand shock, Et?
a decrease in government spending
With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:
a higher interest rate.
During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n):
contractionary shift in the IS curve.
If all past economic fluctuations resulted from inept economic policies, then the historical evidence would support using:
passive macroeconomic policy only.
The dynamic aggregate supply curve illustrates a short-run _____ relationship between output and _____.
positive; inflation
If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run, and:
prices will fall 5 percent in the long run.
Financing a budget deficit by ______ leads to inflation, and inflation ______ the real value of government debt.
printing money; decreases
If the Fed has discretion to choose its own policy and announces a policy of low inflation, then:
private economic actors are likely to discount the policy because the Fed has an incentive to renege on its policy once expectations are formed.
The intersection of the IS and LM curves determines the values of:
r and Y, given G, T, M, and P.
An increase in the interest rate
reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects.
Starting from long-run equilibrium, without policy intervention, the long-run impact of a temporary adverse supply shock is that prices will:
return to the old level, and output will be restored to the natural rate.
If the Fed reduces the money supply by 5 percent, then the real interest rate will:
rise in the short run but return to its original equilibrium level in the long run.
The LM curve, in the usual case:
slopes up to the right.
Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis.
smaller than the multiplier
In comparing two countries with different levels of education but the same saving rate, population growth, and rate of technological progress, one would expect the more highly educated country to have:
the same growth rate of total income and a higher real wage.
Government debt equals the:
the sum of past budget deficits and surpluses
Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and slower deliveries tend to indicate ______ future economic activity.
weaker; stronger
Ricardian equivalence refers to the same impact of financing government:
whether by debt or taxes.
If two economies are identical (including having the same saving rates, population growth rates, and efficiency of labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy with the smaller capital stock:
will be at a lower level than in the steady state of the high capital economy.
In an economy with population growth at rate n, the change in capital stock per worker is given by the equation:
Δk = sf (k) - (δ + n) k
If inflation is bad, why isn't deflation good? Use the IS-LM model to explain how deflation could result in a contraction in output.
Deflation can occur do to a lower aggregate demand for a good. This would then result in a lower output due to less purchases being committed.
Saving ratio to reach Golden Rule steady state
(inflation+growth)(capital-output ratio)
The steady-state level of capital occurs when the change in the capital stock per worker (Δk) equals:
0
If the U.S. production function is Cobb-Douglas with capital share 0.3, output growth is 3 percent per year, depreciation is 4 percent per year, and the Golden Rule steady-state capital-output ratio is 4.29, to reach the Golden Rule steady state, the saving rate must be:
30 percent
The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about ______ in advance.
6 to 9 months
If the marginal product of capital net of depreciation equals 10 percent and the rate of population growth equals 2 percent, then this economy will be at the Golden Rule steady state if the rate of technological progress equals _____ percent.
8
The Golden Rule level of capital accumulation is the steady state with the highest level of:
Consumption per worker
In the Keynesian-cross model, actual expenditures equal:
GDP.
An increase in consumer saving for any given level of income will shift the:
IS curve downward and to the left.
In the IS-LM model, starting with zero expected inflation, if expected inflation becomes negative, then the:
IS curve shifts leftward.
One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LMmodel by shifting the ______ curve to the ______.
IS; Right
One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.
IS; right
In the Solow growth model, increases in capital ______ output and ______ the amount of output used to replace depreciating capital.
Increase; increase
The endogenous growth model's assumption of constant returns to capital is more plausible if capital is defined to include:
Knowledge
Labor productivity
Labor productivity = AK^2/3L^-2/3
Compare and contrast the impact of a faster rate of population growth on the standard of living (output per worker) in the models by Solow, Malthus, and Kremer.
Solow: increased population decreases standard of living because there is a smaller output per worker Malthus: Resources are consumed at a faster rate than they can be produced, which lowers the amount per worker Kremer: Larger population equates to a larger pool of people to generate new ideas. Technological progress accelerates.
A given increase in taxes shifts the IS curve more to the left the:
larger the marginal propensity to consume.
Explain how the Solow growth model differs from models of endogenous growth with respect to: a. the sources of technological progress. b. returns to capital
a. The Solow model assumes that technological exists as an exogenous factor. Endogenous growth models try to explain the source of technological progress. b. The Solow model assumes diminishing returns to capital. Endogenous models assume constant returns to capital.
Increasing government spending when the economy is in a recession is an example of:
active fiscal policy.
Expectations of inflation based on recently observed inflation is called the assumption of _____ expectations.
adaptive
If the short-run aggregate supply curve is assumed to be horizontal and money demand is proportional to income, then the mother of all models in the appendix to Chapter 14 corresponds to which of the following special cases?
aggregate demand and aggregate supply
calculate capital-output ratio at the Golden Rule Steady State
alpha/(inflation+growth)
In the Solow growth model, the steady-state occurs when:
capital per worker is constant.
The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would:
decrease by 1 percent.
If the production function is Y = AK2/3L1/3 in the land of Antegria, and the labor force increases by 5 percent while capital is constant, labor productivity, measured by Y / L, will:
decrease by 3.33 percent.
The dynamic aggregate demand curve is downward sloping because as inflation falls, the central bank reduces the nominal interest rate by more than the fall in the inflation rate, which _____the real interest rate and _____ the quantity of goods and services demanded.
decreases; increases
To follow a monetary policy rule, the central bank raises the nominal interest rate by:
decreasing the money supply.
In the solow growth model with population growth and labor-augmenting technological change, the break-even level of investment must cover:
depreciating capital, capital for new workers, and capital for new effective workers.
Conducting monetary policy so that the federal funds rate = 0.05, where the federal funds rate is the nominal federal funds interest rate, is an example of:
discretionary policy.
When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:
downward and to the left.
The differing interpretations of the historical record of the Great Depression provide support for using:
either active or passive macroeconomic policy.
In the Solow growth model of an economy with population growth but no technological change, the break-even level of investment must do all of the following except:
equal the marginal productivity of capital (MPK)
Hyperinflations typically occur when governments:
finance spending with the inflation tax.
The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate but with a ______ price level or allow the price level to return to its original level but with a ______ level of output in the short run.
higher; lower
The Solow growth model describes:
how saving, population growth, and technological change affect output over time.
The idea that the natural rate of unemployment is increased following extended periods of unemployment is called:
hysteresis
The type of legal system and the level of corruption in a country have been found to be:
important variables explaining the Golden Rule level of capital.
Starting from a steady-state situation, if the saving rate increases, capital per worker will:
increase until the new steady state is reached.
In the Solow growth model, increases in capital ______ output and ______ the amount of output used to replace depreciating capital.
increase; increase
In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income:
increases by more than 250.
When the federal government incurs additional debt to acquire an asset, under current budgeting procedures the deficit ______, while under capital budgeting procedures the deficit ______.
increases; does not change
Over the business cycle, investment spending ______ consumption spending.
is more volatile than
The solow residual will fall even if technology has not changed if there is:
labor hoarding.
The money hypothesis suggests that the Great Depression was caused by a:
leftward shift in the LM curve.
When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______, and the aggregate demand curve shifts ______.
lower; inward
An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, ______ output and ______ interest rates.
lower; raise
If an economy moves from a steady state with positive population growth to a zero population growth rate, then in the new steady state, total output growth will be ______, and growth of output per person will be ______.
lower; the same as it was before
One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines.
lowers; raises
The Solow residual equals the percentage change in output:
minus the percentage changes in factor inputs weighted by each factor's share of output.
Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a five-period positive demand shock causes output to _____ until returning to the natural level in the long run.
move above and then below the natural level of output
According to the natural-rate hypothesis, fluctuations in aggregate demand affect output in:
only in the short run
If the short-run aggregate supply curve is horizontal, and each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:
output and employment will decrease in the short run.
The time between when government spending increases and when aggregate demand starts to increase is an example of an:
outside lag of fiscal policy.
According to the sticky-price model:
some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.
Active economic policy seeks to do all of the following except:
take a hands-off approach to macroeconomic policy.
Endogenous growth theory rejects the assumption of exogenous:
technological change.
Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, output immediately decreases as a result of a one-period positive supply shock because:
the central bank raises the nominal and real interest rates in response to the increase in inflation.
Each of the following conditions will tend to reduce the sacrifice ratio except when:
the concept of hysteresis accurately describes the impact of history on the natural rate of unemployment.
Two interpretations of the IS-LM model are that the model explains:
the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve.
The rate of labor-augmenting technological progress (g) is the growth rate of:
the efficiency of labor.
The interaction of the IS curve and the LM curve determines:
the equilibrium level of the interest rate and output.
To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in ______, and the aggregate demand curve shifts upward because of increases in ______.
the expected price level; the money supply
To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in ______, and the aggregate demand curve shifts upward because of increases in ______.
the expected price level; the money supply.
Which of the following is an example of a demand shock?
the introduction and greater availability of credit cards
Inflation targeting is a monetary policy rule that requires the central bank to adjust _____ in order to attain the desired inflation rate.
the money supply