Explain what type of wage rigidity is most likely to affect the unemployment rates of
the following types of workers:
a. workers with low marginal labor productivity,
b. workers in the construction trades, such as plumbers and electricians,
c. workers engaged in creative work that is not easily monitored.
The production-smoothing motive for holding inventories suggests that:
A) firms hold inventories in order to produce more output.
B) when sales are low, firms produce more than they sell and put the extra goods in
inventories.
C) firms hold inventories to avoid losing sales.
D) when a product is only partly completed, its components are counted as part of the
firm’s inventory.
If inflation is 6 percent and a worker receives a 4 percent nominal wage increase, then
the worker’s real wage:
A) increased 4 percent.
B) increased 2 percent.
C) decreased 2 percent.
D) decreased 6 percent.
Active economic policy seeks to do all of the following except:
A) offset fluctuations in real GDP.
B) use monetary and fiscal policy to shift aggregate demand.
C) respond to changing economic conditions.
D) take a hands-off approach to macroeconomic policy.
Exhibit: Keynesian Cross
(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y1, then
inventories will ______, inducing firms to ______ production.
A) rise; increase
B) rise; decrease
C) fall; increase
D) fall; decrease
According to the macroeconometric model developed by Data Resources Incorporated,
the response of GDP four quarters after an increase in government spending, with the
nominal interest rate held constant, will be ______ the response of GDP to a similar
change with the money supply held constant.
A) less than half as great as
B) approximately equal to
C) more than two times as great as
D) more than three times as great as
When President George H. W. Bush lowered tax withholding in 1992 without lowering
the amount of taxes owed, surveys showed that:
A) almost everyone spent the higher take-home pay.
B) almost everyone saved the higher take-home pay.
C) a majority of respondents said they would spend the higher take-home pay, but a
significant minority said they would save it.
D) a majority of respondents said they would save the higher take-home pay, but a
significant minority said they would spend it.
The principal purpose of a central bank acting as a lender of last resort is to:
A) prevent the failure of insolvent financial institutions.
B) maintain the liquidity of the financial system.
C) provide adequate funds to finance the government’s spending.
D) keep interest rates as low as possible.
The new chain-weighted measures of real GDP are an improvement over traditional
measures because the prices used to compute real GDP are:
A) never far out of date.
B) always from the same base year.
C) imputed.
D) chained to the CPI.
If the production function is Y = AK2/3L1/3 in the land of Solovia, and the labor force
increases by 5 percent while capital is constant, labor productivity will:
A) increase by 3.33 percent.
B) increase by 1.67 percent.
C) decrease by 1.67 percent.
D) decrease by 3.33 percent.
At long-run equilibrium in the dynamic model of aggregate demand and aggregate
supply, which variables will equal the central bank’s target rate of inflation?
A) the current inflation rate, but not the expected inflation rate
B) the expected inflation rate, but not the current inflation rate
C) both the current and expected rates of inflation
D) neither the current nor the expected rates of inflation
Hypotheses to explain the positive correlation between factor accumulation and
production efficiency include each of the following except:
A) the quality of a nation’s institutions influences both factor accumulation and
production efficiency.
B) capital accumulation causes greater production efficiency.
C) efficient economies make capital accumulation unnecessary.
D) an efficient economy encourages capital (including human capital) accumulation.
Most spells of unemployment are ______ term, and most weeks of unemployment are
attributable to ______-term unemployment.
A) short; short
B) short; long
C) long; long
D) long; short
According to the efficient markets hypothesis, changes in stock prices are:
A) driven by irrational waves of optimism.
B) driven by irrational waves of pessimism.
C) rational reflections of underlying economic fundamentals.
D) possible to predict from available information.
In the Solow growth model, if two countries are otherwise identical (with the same
production function, same saving rate, same depreciation rate, and same rate of
population growth) except that Country Large has a population of 1 billion workers and
Country Small has a population of 10 million workers, then the steady-state level of
output per worker will be _____ and the steady-state growth rate of output per worker
will be _____.
A) the same in both countries; the same in both countries
B) higher in Country Large; higher in Country Large
C) higher in Country Small; higher in Country Small
D) higher in Country Large; higher in Country Small
a. What is the sacrifice ratio?
b. What is one factor that could possibly lower the sacrifice ratio for an economy?
c. What is one factor that could possibly increase the sacrifice ratio for an economy?
Compare the traditional view versus the view of Ricardian equivalence of the effects of
a debt-financed tax cut on:
a. national saving,
b. current consumption, and
c. the real interest rate.
According to the traditional view of government debt, if taxes are cut without a cut in
government spending, then in the United States this situation will lead to ______ net
indebtedness on the part of the United States to foreign countries and ______ net
exports.
A) more; more
B) more; fewer
C) less; fewer
D) less; more
In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures
______ for any given level of income.
A) increase by 100
B) increase by more than 100
C) decrease by 100
D) increase, but by less than 100
Exhibit: Steady-State Consumption II
(Exhibit: Steady-State Consumption II) The Golden Rule level of steady-state
investment per worker is:
A) AC.
B) AB.
C) BC.
D) DE.
Over the past 50 years in the United States:
A) output per worker hour, capital stock per worker hour, the real wage, and the real
rental price of capital have all increased about 2 percent per year.
B) output per worker hour, the real wage, and the real rental price of capital have all
increased about 2 percent per year, whereas capital stock per worker hour has increased
faster.
C) output per worker hour and the real wage have both increased about 2 percent per
year, whereas capital stock per worker hour has increased faster and the real rental price
of capital has remained about the same.
D) output per worker hour, the real wage, and capital stock per worker hour have all
increased about 2 percent per year, whereas the real rental price of capital has remained
about the same.
A speculative attack on a currency occurs when:
A) a central bank switches from a floating to a fixed exchange rate.
B) investors’ perceptions change, making a fixed exchange rate untenable.
C) a country accepts dollarization.
D) a central bank adopts a currency board to back the domestic currency with a foreign
currency.
One item that is considered part of the federal debt is:
A) Treasury bills.
B) future Social Security benefits.
C) student loans, which may go into default.
D) potential liabilities of savings and loan associations.
In the IS“LM model, a decrease in government purchases leads to a(n) ______ in
planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and
a(n) ______ in the equilibrium interest rate.
A) decrease; decrease; decrease; decrease
B) increase; increase; increase; increase
C) decrease; decrease; increase; increase
D) increase; increase; decrease; decrease
Under a floating system, the exchange rate:
A) fluctuates in response to changing economic conditions.
B) is maintained at a predetermined level by the central bank.
C) is changed at regular intervals by the central bank.
D) fluctuates in response to changes in the price of gold.
Explain what force moves the market back to equilibrium if the market is initially in
disequilibrium in:
a. the market for goods and services;
b. the market for real money balances.
If consumers obey the permanent-income hypothesis and have rational expectations,
then policy changes affect consumption when the policy changes:
A) are proposed.
B) go into effect.
C) change expectations.
D) do not surprise consumers.
An estimate of the number of unemployed workers in the economy can be obtained
from:
A) both the household and establishment surveys.
B) from the household survey, but not from the establishment survey.
C) from the establishment survey, but not from the household survey.
D) from neither the household nor the establishment surveys.
The marginal propensity to consume is the:
A) ratio of consumption to income.
B) amount consumed out of an additional dollar of income.
C) amount available for consumption after precautionary saving.
D) ratio of consumption to wealth.
If the number of employed workers equals 200 million and the number of unemployed
workers equals 20 million, the unemployment rate equals ______ percent (rounded to
the nearest percent).
A) 0
B) 9
C) 10
D) 20