Barro
Chapter 8
TRUE/FALSE
1. Intertemporal substitution effects are substitution effects over time.
2. When the marginal product of labor increases due to a positive technology change, the real wage falls.
3. The model predicts that in response to a permanent positive change in technology real consumption
will be procyclical.
4. An increase in the interest rate makes future consumption cheaper and future leisure more expensive.
5. The income effect on labor supply is positive.
6. A trend line for U.S. GDP since World War II is mostly flat.
7. In the equilibrium business cycle model, an improvement in the level of technology will increase the
real wage rate.
8. In the equilibrium business cycle model, an improvement in the level of technology will decrease the
interest rate.
9. In the equilibrium business cycle model, an improvement in the level of technology will decrease the
interest rate.
10. The equilibrium business cycle model predicts that the real wage will be procyclical.
11. The equilibrium business cycle model predicts that the real rental price of capital will be procyclical.
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12. The equilibrium business cycle model predicts that real investment will be countercyclical.
MULTIPLE CHOICE
1. The cyclical part of real GDP is
a.
trend real GDP less real GDP.
c.
real GDP/trend real GDP.
b.
real GDP less trend real GDP.
d.
trend real GDP/real GDP.
2. Real GDP equals:
a.
trend real GDP plus the cyclical part of
GDP
c.
trend real GDP less the cyclical part of
GDP.
b.
trend real GDP times the cyclical part of
GDP.
d.
trend real GDP divided by the cyclical
part of GDP.
3. An equilibrium business-cycle model:
a.
uses shocks to GDP to find equilibrium
conditions.
c.
uses equilibrium conditions to determine
how shocks affect real GDP and other
macroeconomic variables. .
b.
uses GDP to find equilibrium shocks to
the economy.
d.
uses GDP to find equilibrium conditions.
4. An increase in the level of technology, A, causes:
a.
an increase in the MPL
c.
a movement along the MPL hiring more
labor.
b.
a decrease in the MPL
d.
a movement along the MPL hiring less
labor.
5. The model predicts that an economic expansion caused by an increase in technology, A, will:
a.
drive down the real wage.
c.
drive up the real wage.
b.
cause labor supply to be greater than labor
demand.
d.
lead to a relatively low real wage.
6. The model predicts that in a recession caused by an decrease in technology, A, we would observe:
a.
a relatively low real wage.
c.
a relatively high real wage.
b.
an excess demand for labor.
d.
an increase in the MPL
7. If technology, A, increases, then:
a.
the MPK and the demand for capital
services increase.
c.
the MPK increases and the demand for
capital services decreases.
b.
the MPK and the demand for capital
d.
the MPK decreases and the demand for
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services decrease.
capital services increases.
8. The model predicts that if there is a technology, A, shock, the real rental price of capital will:
a.
be relatively high during an economic
expansion or a recession.
c.
be relatively high during an economic
expansion and relatively low during a
recession.
b.
be relatively low during an economic
expansion or a recession.
d.
be relatively low during an economic
expansion and relatively high during a
recession.
9. The model predicts that if there is a technology, A, shock, the interest rate, i, will be:
a.
relatively high during an economic
expansion or a recession.
c.
relatively high during an economic
expansion and relatively low during a
recession.
b.
relatively low during an economic
expansion or a recession.
d.
relatively low during an economic
expansion and relatively high during a
recession.
10. During an economic expansion due to an increase in technology, A, consumption will:
a.
tend to rise due to the income effect.
c.
tend to fall due to the intertemporal
substitution effect of the interest rate
rising.
b.
may rise or fall depending on whether the
income effect is greater than the
substitution effect or not.
d.
all of the above.
11. During an economic expansion due to an increase in technology, A, consumption will:
a.
tend to fall due to the income effect.
c.
tend to rise due to the intertemporal
substitution effect of the interest rate
rising.
b.
may rise or fall depending on whether the
income effect is greater than the
substitution effect or not.
d.
all of the above.
12. During an economic expansion due to an increase in technology, A, consumption will:
a.
tend to rise due to the income effect.
c.
tend to rise due to the intertemporal
substitution effect of the interest rate
rising.
b.
be unchanged.
d.
tend to fluctuate.
13. During an economic expansion due to an increase in technology, A, consumption will:
a.
tend to fall due to the income effect.
c.
tend to fall due to the intertemporal
substitution effect of the interest rate
rising.
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b.
be unchanged.
d.
tend to fluctuate.
14. If technology, A, increases permanently then we would expect:
a.
consumption to decrease as the
substitution effect would be greater than
the income effect of the change.
c.
consumption to increase as the
substitution effect would be greater than
the income effect of the change.
b.
consumption to increase as the income
effect would be greater than the
substitution effect of the change.
d.
consumption to decrease as the income
effect would be greater than the
substitution effect of the change.
15. If there is a permanent increase in technology, A, then we expect consumption to:
a.
increase by more than real GDP.
c.
increase but by less than real GDP.
b.
increase by the same amount as real GDP.
d.
be unchanged.
16. If there were a permanent increase in technology, A, we would expect real saving to:
a.
increase as the increase in real
consumption is less than real GDP.
c.
decrease as the increase in real
consumption is more than real GDP.
b.
increase as the increase in real
consumption is more than real GDP.
d.
decrease as the increase in real
consumption is less than real GDP.
17. A variable that moves in the same direction as real GDP is known as:
a.
acyclical.
c.
countercyclical.
b.
procyclical.
d.
exogenous.
18. A variable that has little tendency to move during a business cycle is known as:
a.
acyclical.
c.
countercyclical.
b.
procyclical.
d.
exogenous.
19. A variable that moves in the opposite direction as real GDP is known as:
a.
acyclical.
c.
countercyclical.
b.
procyclical.
d.
exogenous.
20. An acyclical variable is one that:
a.
moves the same direction as real GDP.
c.
moves the opposite direction as real GDP.
b.
has little tendency to move during a
business cycle.
d.
determined outside the model.
21. An procyclical variable is one that:
a.
moves the same direction as real GDP.
c.
moves the opposite direction as real GDP.
b.
has little tendency to move during a
d.
determined outside the model.
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business cycle.
22. An countercyclical variable is one that:
a.
moves the same direction as real GDP.
c.
moves the opposite direction as real GDP.
b.
has little tendency to move during a
business cycle.
d.
determined outside the model.
23. US real consumer expenditure since 1954 has been:
a.
procyclical.
c.
a cyclical.
b.
countercyclical.
d.
exogenous.
24. US real gross domestic private investment since 1954 has been:
a.
procyclical.
c.
a cyclical.
b.
countercyclical.
d.
exogenous.
25. Since 1954, in the US:
a.
real gross private investment has varied
more than real GDP, while real consumer
expenditure has varied less than real GDP.
c.
real gross private investment has varied
less than real GDP, while real consumer
expenditure has varied more than real
GDP.
b.
real gross private investment and real
consumer expenditure have varied more
than real GDP.
d.
real gross private investment and real
consumer expenditure have varied less
than real GDP.
26. US real average earnings of production workers since 1954 has been:
a.
procyclical.
c.
a cyclical.
b.
countercyclical.
d.
exogenous.
27. US real rental price of capital since 1954 has been:
a.
procyclical as the model predicts.
c.
procyclical rather countercyclical as the
model predicts.
b.
countercyclical as the model predicts.
d.
countercyclical rather procyclical as the
model predicts.
28. An example of a temporary change in technology would be:
a.
a new discovery.
c.
a harvest failure.
b.
a new invention.
d.
all of the above.
29. An example of a temporary change in technology would be:
a.
a new discovery.
c.
a new invention.
b.
a general strike.
d.
all of the above.
30. With a temporary change in technology the model predicts:
a.
the interest rate will be procyclical.
c.
a higher interest rate will motivate
households to increase current real saving.
b.
a lower interest rate will motivate
households to increase current real
consumption.
d.
all of the above.
31. With a temporary change in technology the model predicts:
a.
the interest rate will be procyclical.
c.
a higher interest rate will motivate
households to decrease current real saving.
b.
a lower interest rate will motivate
households to decrease current real
consumption.
d.
all of the above.
32. With a temporary change in technology, we would expect:
a.
the income effect of consumption to be
larger.
c.
the intertemporal substitution effect on
consumption to be larger.
b.
the income effect of consumption to be
smaller.
d.
the intertemporal substitution effect on
consumption to be larger.
33. With a temporary positive change in technology we would expect real current consumption:
a.
to increase a lot.
c.
to remain unchanged.
b.
to decrease a lot.
d.
to either increase or decrease a little.
34. With a temporary change in technology, A, we expect little change in consumption because:
a.
the income effect on consumption is
larger.
c.
the intertemporal-substitution effect is
larger.
b.
the income effect on consumption is
smaller.
d.
the intertemporal-substitution effect is
smaller.
35. The model predicts that an economic expansion caused by a temporary increase in technology, A,
would lead to:
a.
high real GDP and investment.
c.
low real GDP and investment.
b.
low real GDP and high real investment.
d.
high real GDP and low real investment.
36. Temporary changes in technology, A, conflict with the data in that:
a.
investment is clearly acyclical.
c.
the wage rate is clearly countercyclical.
b.
consumption is clearly procyclical.
d.
all of the above.
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37. A higher real wage:
a.
makes consumption more expensive.
c.
makes leisure less expensive.
b.
makes it a worse deal for households to
work an extra hour.
d.
makes leisure more expensive.
38. A higher real wage:
a.
increases the income of households
inducing them to work more.
c.
increases the income of households
inducing them to work less.
b.
decreases the income of households
inducing them to work more.
d.
decreases the income of households
inducing them to work less.
39. The overall effect of a higher real wage is:
a.
to increase labor as the income and
substitution effect reinforce each other.
c.
to decrease labor as the income and
substitution effect reinforce each other.
b.
ambiguous on labor as the income and
substitution effect work against each
other.
d.
ambiguous because the income and
substitution effect reinforce each other.
40. We expect that an increase in real wages will:
a.
increase labor supply, if temporary.
c.
increase labor supply, whether permanent
or temporary.
b.
increase labor supply, if permanent.
d.
reduce labor supply, whether permanent or
temporary.
41. An increase in the interest rate induces worker to:
a.
work more in the current period and less
in the future.
c.
work less in the current period and more
in the future.
b.
work more in the current period and in the
future.
d.
work less in the current period and in the
future.
42. A higher interest rate makes:
a.
future consumption cheaper.
c.
current consumption more expensive.
b.
future leisure cheaper.
d.
all of the above.
43. A higher interest rate makes:
a.
future consumption and leisure more
expensive.
c.
future consumption and leisure cheaper.
b.
future consumption cheaper and future
leisure more expensive.
d.
future consumption more expensive and
future leisure cheaper.
44. A higher interest rate makes:
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a.
current consumption and leisure more
expensive.
c.
current consumption and leisure cheaper.
b.
current consumption cheaper and current.
leisure more expensive.
d.
current consumption more expensive and
current leisure cheaper.
45. A higher interest rate makes:
a.
current consumption and future leisure
more expensive.
c.
current consumption and future leisure
cheaper.
b.
current consumption cheaper and future.
leisure more expensive.
d.
current consumption more expensive and
future leisure cheaper.
46. Intertemporal substitution effects motivate households to:
a.
supply more labor when the wage rate is
temporarily low.
c.
supply less labor when the wage rate is
temporarily low.
b.
supply more labor when the wage rate is
permanently low.
d.
supply more labor when the wage rate is
permanently low.
47. In the US since 1964 total hours worked and employment have been:
a.
acyclical.
c.
procyclical.
b.
countercyclical.
d.
exogenous.
48. The measure of labor productivity used in the popular media is:
a.
Y/L
c.
procyclical.
b.
average product of labor.
d.
all of the above.
49. In the model with an upward sloping supply curve of labor and increase demand for labor due to a
positive technological, A, change:
a.
increases employment and the real wage.
c.
decreases employment and the real wage.
b.
decreases employment and increases the
real wage.
d.
decreases employment and increases the
real wage.
50. When the labor supply of households is allowed to slope upward:
a.
the model predictions match the observed
data that employment and real wages are
countercyclical.
c.
the model predictions do not match the
observed data that employment and real
wages are procyclical.
b.
the model predictions do not match the
observed data that employment and real
wages are countercyclical.
d.
the model predictions match the observed
data that employment and real wages are
procyclical.
51. The most important feature of U.S. real GDP in the post-World War II era most likely is
a.
the overall upward trend.
c.
the large fluctuations relative to trend.
b.
the high standard deviation from trend.
d.
the many recessions related to politics.
52. The equilibrium business cycle model, unlike the long-run Solow growth model, assumes that
a.
changes in capital are important.
c.
the interest rate always rises.
b.
changes in capital are insignificant.
d.
the cyclical growth in GDP is positive.
53. Suppose that the economy suffers a major natural disaster. The equilibrium business-cycle model
predicts that the interest rate will be
a.
unchanged.
c.
relatively low.
b.
relatively high.
d.
greater than the return on capital.
54. Suppose that the economy suffers a major natural disaster. The equilibrium business-cycle model
predicts that the real rental price of capital will be
a.
unchanged.
c.
relatively low.
b.
relatively high.
d.
greater than the return on capital.
55. According to the equilibrium business-cycle model, a major improvement in competitiveness in a
nation’s economy will affect the real wage in which way?
a.
The real wage will be unchanged.
c.
The real wage will be relatively low.
b.
The real wage cannot be predicted.
d.
The real wage will be relatively high..
56. In the equilibrium business-cycle model, an improvement in the level of technology causes
a.
an economic expansion.
c.
a trend level of GDP.
b.
a recession.
d.
an economic shock.
57. In the equilibrium business-cycle model, an economic expansion typically starts with
a.
an improvement in the level of
technology.
c.
a decline in the level of technology
b.
an increase in the stock of capital.
d.
a decrease in the stock of capital.
58. In the equilibrium business-cycle model, a recession typically starts with
a.
an improvement in the level of
technology.
c.
a decline in the level of technology
b.
an increase in the stock of capital.
d.
a decrease in the stock of capital.
59. In the equilibrium business-cycle model, a recession would be characterized by
a.
a relatively low real wage and relatively
high real rental price of capital.
c.
a relatively high real wage and relatively
low real rental price of capital.
b.
a relatively low real wage and real rental
price of capital.
d.
a relatively high real wage and real rental
price of capital.
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60. In the equilibrium business-cycle model, a recession would be characterized by
a.
a relatively low interest rate and relatively
high real rental price of capital.
c.
a relatively high interest rate and relatively
low real rental price of capital.
b.
a relatively high real wage and real rental
price of capital.
d.
a relatively low interest rate and real rental
price of capital.
61. In the equilibrium business-cycle model, an economic expansion would be characterized by
a.
a relatively low real wage and relatively
high real rental price of capital.
c.
a relatively high real wage and real rental
price of capital.
b.
a relatively low real wage and real rental
price of capital.
d.
a relatively high real wage and relatively
low real rental price of capital.
62. Which of the following variables is procyclical, according to the equilibrium business-cycle model?
a.
the real wage rate
c.
the real rental rate on capital
b.
the real interest rate
d.
all of the above
63. Which of the following variables is countercyclical, according to the equilibrium business-cycle
model?
a.
the real wage rate
c.
the real rental rate on capital
b.
the real interest rate
d.
none of the above
64. The equilibrium real-business cycle model predicts that labor productivity will be
a.
procyclical.
c.
acyclical.
b.
countercyclical.
d.
indeterminate.
65. The measure known as total hours worked
a.
multiplies employment by 40.
c.
divides employment by 24.
b.
divides employment by the average wage
rate.
d.
multiplies employment by the average
weekly hours worked per employee.
SHORT ANSWER
1. If there is a positive technological change, what happens in the labor market?
2. What does the model predict about investment when technology increases and why and what do the
data show about investment in the US?
3. What happens to consumption when there is a permanent and temporary increase in technology, A,
and why?
4. What is the relationship between real GDP and the cyclical part of GDP?
5. What happens in the model, if a temporary technology change increase real wages temporarily?
6. What does the real business-cycle model predict will be the relationship between an economic
expansion and the real rental price of capital?