54
Barro
Chapter 6
TRUE/FALSE
1. Bond holdings and interest income are zero for the whole economy.
2. The household real budget constraint shows that household real consumption is equal to household
real income plus household real saving.
3. In the Barro model prices like the real wage adjust to clear markets like the labor market.
4. In the Barro model the nominal rate of return on capital, (R/P) – is greater than the nominal return on
bonds, i, because capital is viewed by households as more risky than bonds.
5. Real profit equals real output plus spending on capital and labor inputs.
6. In the bond market, a higher interest rate means that borrowing is less expensive than before.
7. Household decisions depend on the nominal values for wages and rent rather than the real values for
wages and rent.
8. In the Barro model, households use money as a means for trading goods and services.
9. In the Barro market model, gold serves as money.
10. The market-clearing interest rate depends on the marginal productivity of capital.
MULTIPLE CHOICE
1. The market clearing approach assumes that:
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a.
people are not able to affect prices that
influence their decisions.
c.
firms are not able to affect prices that
influence their decisions.
b.
prices adjust to clear markets.
d.
all of the above.
2. The market clearing approach assumes that:
a.
people are not able to affect prices that
influence their decisions.
c.
firms are able to affect prices that
influence their decisions.
b.
prices change very slowly.
d.
all of the above.
3. The market clearing approach assumes that:
a.
people are able to affect prices that
influence their decisions.
c.
firms are able to affect prices that
influence their decisions.
b.
prices adjust to clear markets.
d.
all of the above.
4. The market clearing approach assumes that:
a.
people are able to affect prices that
influence their decisions.
c.
firms are not able to affect prices that
influence their decisions.
b.
prices change very slowly.
d.
all of the above.
5. The labor market clears when:
a.
the real wage causes LS = LD.
c.
the marginal product of labor is zero.
b.
the real wage causes LS to be minimized.
d.
the real wage causes LS to be as large as
possible.
6. In the goods market in the Barro model households can buy:
a.
bonds.
c.
labor services.
b.
goods to increase their stock of capital.
d.
all of the above.
7. The goods market the price, P, is:
a.
the price level.
c.
the price of a particular good.
b.
the rental price of goods.
d.
the interest rate.
8. In the rental market in the Barro model, households buy and sell:
a.
real estate.
c.
the use of capital for one period.
b.
consumer durables like cars.
d.
all of the above.
9. A bond that is traded in the bond market in the Barro model is piece of paper that:
a.
is the lenders claim to the amount owed by
the borrower.
c.
is the lenders claim to ownership in the
company.
b.
is the borrowers claim to the amount owed
d.
assures the person is who they say they
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by the lender.
are.
10. Money in the Barro model is held because:
a.
for its own sake.
c.
to earn interest.
b.
to trade fairly soon for something else.
d.
all of the above.
11. Money in the Barro model is:
a.
gold.
c.
interest earning.
b.
a medium of exchange.
d.
all of the above.
12. One unit of money in the Barro model has a purchasing power of:
a.
the price level time that one unit, P.
c.
the interest rate, i.
b.
the price level over the interest rate, (P/i).
d.
one over the price level, (1/P)
13. If a household has $2,000 in money and the price level is 10, then the real value of its money is:
a.
$10.
c.
200 goods.
b.
$20,000.
d.
1,900 goods.
14. The real wage is:
a.
hourly earning after taxes.
c.
the value of a worker’s time in goods
received.
b.
wages plus fringe benefits.
d.
the price level divided by the nominal
wage rate.
15. If the nominal wage rate is $10 per hour and the price level is 2, then the real wage a worker earns is:
a.
five units of goods per hour.
c.
twenty units of goods per hour.
b.
eight units of goods per hour.
d.
one-fifth unit of goods per hour.
16. If the rental price of a capital good is $100 and the price level is 25, then when renting the capital the
owner’s real earnings are:
a.
4 units of output per period.
c.
seventy five units of output per period.
b.
2,500 units of output per period.
d.
one-forth unit of output per period.
17. The rental price of capital is:
a.
a dollar amount per unit of capital.
c.
a nominal interest rate
b.
a real interest rate.
d.
profit.
18. Over all households bonds, B, must total zero because:
a.
there are no bonds in the model.
c.
bonds are not important in the model.
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b.
for every dollar loaned a dollar is
borrowed in the bond market.
d.
bonds are illegal in most economies.
19. The profit in the model is:
a.
output – (wages times labor hired + the
rental price times capital rented).
c.
(price times output) – (wages times labor
hired + the rental price times capital
rented).
b.
(price times output) divided by (wages
times labor hired + the rental price times
capital rented).
d.
(wages times labor hired + the rental price
times capital rented) – (price times output).
20. The rate of return from owning capital is:
a.
the rental price of capital, R.
c.
the net nominal rental income, (R/P)•PK –
PK.
b.
the value of depreciation, PK.
d.
the real rental price less depreciation,
(R/P) – .
21. The principal of a bond is:
a.
the amount of interest paid each period.
c.
the amount of interest paid over the term
of the bond.
b.
the initial amount borrowed.
d.
the total amount to be paid back including
the amount borrow and the amount of
interest paid over the term of the bond.
22. The maturity of a bond is:
a.
the amount of interest paid each period.
c.
the amount of interest paid over the term
of the bond.
b.
the amount borrowed.
d.
the time at which the lender must be paid
back.
23. If the principal of a bond is $100, it matures in a year and the interest rate is 4%, then at the interest
payment on this bond will be:
a.
$100.
c.
$4.
b.
$96.
d.
$400.
24. If the principal of a bond is $1000, it matures in a year and the interest rate is 6%, then at the end of
the year the lender will receive:
a.
$1000.
c.
$60.
b.
$1060.
d.
$940.
25. In the market clearing model, for the whole economy interest income is:
a.
bonds minus the interest rate.
c.
the interest rate divided by bonds.
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b.
zero.
d.
bonds divided by the interest rate.
26. Individual household nominal income includes:
a.
nominal interest income, iB.
c.
nominal wage income, wL.
b.
nominal net rental income, [(R/P) –
PK]•PK.
d.
all of the above.
27. In the model the nominal interest rate equals the nominal net return on capital, i = (R/P) – , because:
a.
other than rates of return bonds and capital
look the same to households as assets.
c.
bonds are riskier than capital.
b.
capital is riskier than bonds.
d.
bonds are zero in the aggregate.
28. In the model the nominal interest rate equals the nominal net return on capital, i = (R/P) – , because:
a.
bonds are zero in the aggregate.
c.
bonds are riskier than capital.
b.
capital is riskier than bonds.
d.
if bonds offered a higher return than
capital households would hold no capital.
29. According to the household nominal budget constraint, PC+ B+P• K = + wL + i(B + PK),
households can use their income to:
a.
purchase consumption goods.
c.
purchase capital goods.
b.
acquire more bonds.
d.
all of the above.
30. Interest income is:
a.
positive for net bond holders.
c.
negative for net bond issuers.
b.
zero for the whole economy.
d.
all of the above.
31. According to the household nominal budget constraint, PC+ B+P• K = + wL + i(B + PK),
households can use their income to:
a.
purchase consumption goods.
c.
acquire more money.
b.
hire more workers.
d.
all of the above.
32. According to the household nominal budget constraint, PC+ B+P• K = + wL + i(B + PK),
households can use their income to:
a.
acquire more money.
c.
pay more wages.
b.
acquire more bonds.
d.
all of the above.
33. According to the household nominal budget constraint, PC+ B+P• K = + wL + i(B + PK),
households can use their income to:
a.
hire more workers.
c.
purchase capital goods.
b.
acquire more money.
d.
all of the above.
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34. If a household this week produces 20 of its product at a cost of 50 cents each, sells them for $1, works
40 hours at $10 per hour, must pay $10 in interest owed on its borrowing and rents out 10 units of
capital at $100 for the week, the household’s, nominal income is:
a.
$1,440 this week.
c.
$1,420 this week.
b.
$1,400 this week.
d.
none of the above.
35. The household real budget constraint C + ( B/P) + K = ( /P)+ (w/P)•L + i•((B/P) + K).
shows that in our model:
a.
households get income only from labor.
c.
households can spend their income only
on consumption.
b.
households can spend their income on
consumption or acquiring more capital
and bonds.
d.
households view bonds as riskier than
capital.
36. The household’s budget constraint shows that:
a.
sources of fund = uses of funds.
c.
labor income is the largest part of income.
b.
profits are the largest part of income
d.
consumption is the largest part of
spending.
37. The household real budget constraint C + ( B/P) + K = ( /P) + (w/P)•L + i•((B/P) + K).
shows that in our model:
a.
households get income only from labor.
c.
households get income from profits from
production, labor and interest on bonds
and capital.
b.
households can spend their income only
on consumption.
d.
households view bonds as riskier than
capital.
38. To maximize profit a firm should hire labor:
a.
until it can produce no more of its product.
c.
until the marginal product of labor equal
the real wage rate.
b.
until the marginal product of labor begins
to fall.
d.
until the marginal product of labor is zero.
39. An investment in the Barro model is:
a.
the purchase of a bond.
c.
the purchase of a capital good used for
production.
b.
the purchase of ownership in a firm.
d.
all of the above.
40. To maximize profit a firm should hire capital:
a.
until it can produce no more of its product.
c.
until the marginal product of capital equal
the real rental price of capital.
b.
until the marginal product of labor begins
d.
until the marginal product of capital is
to fall.
zero.
41. In the market for capital services:
a.
the supply of capital adjusts to create
market clearing.
c.
the demand for capital adjusts to create
market clearing.
b.
the real rental price of capital adjusts to
create market clearing.
d.
all of the above.
42. In the market clearing model, depreciation, , is:
a.
the rate at which capital disappears.
c.
the rate at which bonds lose value.
b.
the rate at which money loses value.
d.
all of the above.
43. In the market clearing model:
a.
households can owe pay interest.
c.
for the whole economy interest income is
zero.
b.
households can earn interest.
d.
all of the above.
44. In the market clearing model, nominal saving is:
a.
the change in money + the change in
bonds + the change in the nominal value
of capital.
c.
+ wL + i(B + PK) – PC.
b.
nominal income less nominal
consumption.
d.
all of the above.
45. In the market clearing model, nominal saving is:
a.
the change in money + the change in
bonds.
c.
+ wL + i(B + PK) – PC.
b.
nominal income plus nominal
consumption.
d.
all of the above.
46. In the market clearing model, nominal saving is:
a.
always zero.
c.
nominal income – depreciation of capital.
b.
nominal income less nominal
consumption.
d.
all of the above.
47. In the market clearing model, nominal saving is:
a.
the change in money + the change in
bonds + the change in the nominal value
of capital.
c.
always zero.
b.
nominal income plus nominal saving.
d.
all of the above.
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48. Real saving is:
a.
+ wL + i(B + PK) – PC.
c.
( /P) + (w/P)L + i((B/P) + K) – C.
b.
output plus consumption.
d.
all of the above.
49. Figure 6.1
Real C
Real S
In Figure 6.1 an increase in real income is shown by:
a.
a shift of the curve up and to the right.
c.
a shift of the curve inward and to the left.
b.
rotating the curve out the real
consumption axis.
d.
rotating the curve up the real saving axis.
50. In the market clearing model, the demand for capital and labor come from:
a.
the tastes of people.
c.
the objective of profit maximizing.
b.
rental and labor markets.
d.
all of the above.
51. In the goods market, production of goods comes from
a.
large corporate firms.
c.
households.
b.
technology-related businesses.
d.
large partnerships.
52. Households buy goods on the goods market because they wish to
a.
consume.
c.
export.
b.
invest.
d.
both (a) and (b).
53. Households provide to the rental market
a.
all available capital services, so that no
capital remains idle.
c.
none of their capital services, since
households do not own capital.
b.
some of their capital services, leaving a
fraction of capital idle.
d.
none of their capital services, so that only
businesses own capital.
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54. In the Barro market model, currency is used
a.
to earn interest income.
c.
only in the bond market.
b.
as a medium of exchange.
d.
only in the labor market.
55. Households earn interest from
a.
holding bonds and holding money.
c.
holding bonds, but not from holding
money.
b.
holding money, but not from holding
bonds.
d.
none of the above.
56. To simplify the analysis of the bond market, the Barro bond market model initially assumes that
a.
each bond has a different risk level.
c.
bond maturities are long.
b.
a bond has no principal amount.
d.
the inflation rate is zero.
57. A household views the real rental price for capital (R/P) as
a.
the rate of return on capital only after it is
adjusted for depreciation.
c.
the profit from its production of goods and
services.
b.
the rate of return on capital only after it is
adjusted for inflation.
d.
the profit from its holdings of bonds and
money.
58. In the Barro markets model, the medium(s) of exchange
a.
is bonds.
c.
are both bonds and money.
b.
is money.
d.
are bonds, money, and labor services.
59. If bonds offer a higher rate of return than capital does, then households would
a.
hold neither bonds nor capital.
c.
hold bonds only.
b.
hold capital only.
d.
hold both bonds and capital.
60. In the market for capital services, if the real rental price is below the market-clearing rental price, then
a.
suppliers of capital services would
compete by bidding down the real rental
price.
c.
the market for capital services would be in
equilibrium.
b.
suppliers of capital services would
compete by bidding up the real rental
price.
d.
demanders of capital services would
compete by bidding up the real rental
price.
SHORT ANSWER
1. How is profit calculated in the model?
2. What is the household real budget constraint and what does it tell us?
3. In the model why does the return on bonds, i, equal the return on capital, (R/P) – ?
4. What is real profit in the Barro model?
5. What causes the labor and capital markets to clear in the Barro model?
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6. In the Barro market-clearing model, on what variable does the interest rate depend? Explain briefly.
7. Why does the Barro model assume that the labor and capital market clear? Explain briefly.
8. In the Barro market model, why are equilibrium profits equal to zero?
ANS: