In the classical model with fixed income a decrease in the real interest rate could be the
result of a(n):
A) increase in government spending.
B) increase in desired investment.
C) increase in taxes.
D) decrease in taxes.
The factor that makes national saving equal investment, in equilibrium, is:
A) the interest rate.
B) private saving.
C) public saving.
D) fiscal policy.
Exhibit: Consumption, Income, and Wealth Over the Life Cycle
Consider the stylized pattern of lifetime income, consumption, saving, dissaving, and
wealth shown in the above graph. Assume that consumption is constant over the entire
lifetime, income is constant over the working lifetime, the real interest rate is zero, and
there is no uncertainty about life span so that wealth equals zero at the end of life.
a. If there is no population growth, the ratio of wealth to income will be constant for the
nation. If all individuals live T years and work R years, the amount of wealth
accumulated at the time of retirement must be enough for T ” R years of consumption
(C per year). What is the formula for the ratio of average wealth over the whole life
cycle W to consumption per year, as a function of T and R? That is, what is W/C
expressed in terms of T and R?
b. If T = 50 and R = 40, what is the numerical value of W/C?
The dynamic aggregate demand curve will shift if any of the following changes except
the:
A) current inflation rate
B) inflation target.
C) natural level of output.
D) demand shock.
Subprime borrowers are borrowers:
A) who obtain loans at interest rates below the prime rate.
B) most likely to make their loan payments on time.
C) with risky credit profiles.
D) who borrow to purchase smaller homes.
Suppose an economy is initially in a steady state with capital per worker below the
Golden Rule level. If the saving rate increases to a rate consistent with the Golden Rule,
then in the transition to the new steady state consumption per worker will:
A) always exceed the initial level.
B) first fall below then rise above the initial level.
C) first rise above then fall below the initial level.
D) always be lower than the initial level.
Using the model of aggregate demand”aggregate supply to illustrate the traditional
view, graphically compare the short-run and long-run impact of debt-financed tax cuts
on:
a. output,
b. prices.
An economy’s factors of production and its production function determine the
economy’s:
A) labor force participation rate.
B) budget surplus or deficit.
C) population growth rate.
D) output of goods and services.
Beginning at long-run equilibrium in the dynamic model of aggregate demand and
aggregate supply, in the periods after a multiperiod positive demand shock occurs, the
DAS shifts upward because:
A) the central bank increases the target rate of inflation in response to higher rates of
inflation.
B) the deviation of output from the natural level of output increases as result of higher
rates of inflation.
C) higher rates of inflation generate positive supply shocks.
D) expectations of inflation increase as a result of higher inflation in previous periods.
With population growth at rate n and labor-augmenting technological progress at rate g,
the Golden Rule steady state requires that the marginal product of capital (MPK):
A) net of depreciation be equal to n + g.
B) net of depreciation be equal to the depreciation rate plus n + g.
C) plus n be equal to the depreciation rate plus g.
D) plus g be equal to the depreciation rate plus n.
The demand for the economy’s output:
A) is always equal to the supply, regardless of the interest rate.
B) may be computed provided that we know disposable income.
C) is equal to consumption, investment, and government purchases.
D) is determined by government purchases and taxes.
When insiders have a much greater impact on the wage-bargaining process than do
outsiders, the negotiated wage is likely to be ______ the equilibrium wage.
A) much greater than
B) much less than
C) almost equal to
D) about one-half of
Assets of banks include:
A) money market mutual funds.
B) currency in the hands of the public.
C) loans to customers.
D) demand deposits.
In a short-run model of a large open economy with a floating exchange rate, a fiscal
expansion causes an increase in:
A) the exchange rate and a fall in net exports but has no effect on income.
B) the money supply and an increase in income but has no effect on the exchange rate.
C) income, the interest rate, and net exports, but a decrease in investment and in the
exchange rate.
D) income, the interest rate, and the exchange rate, but a decrease in investment and net
exports.
That output, Yt, and the real interest rate, rt, do not depend on the central bank’s
inflation target in long-run equilibrium in the dynamic model of aggregate demand and
aggregate supply demonstrates:
A) monetary neutrality.
B) an impulse response function.
C) adaptive expectations.
D) Taylor’s principle.
Variables that a model tries to explain are called:
A) endogenous.
B) exogenous.
C) market clearing.
D) fixed.
The definition of the transactions velocity of money is:
A) money multiplied by prices divided by transactions.
B) transactions divided by prices multiplied by money.
C) money divided by prices multiplied by transactions.
D) prices multiplied by transactions divided by money.
If a consumer cannot borrow, then consumption in period one must be ______ income
in period(s) _____.
A) less than; one
B) less than or equal to; one
C) less than; one and two
D) less than or equal to; one and two
Variables expressed in terms of money are called ______ variables.
A) real
B) nominal
C) endogenous
D) exogenous
Exhibit: Steady-State Consumption I
The Golden Rule level of the capital”labor ratio is:
A)
B) above but below
C)
D) above
Nominal GDP means the value of goods and services is measured in ______ prices.
A) current
B) real
C) constant
D) average
During hyperinflation real tax revenue of the government often drops substantially
because of the:
A) delay between when a tax is levied and when it is collected.
B) significantly greater menu costs of printing tax forms.
C) additional deductions taken for increased shoeleather costs.
D) greater uncertainty associated with extreme rates of inflation.
A firm’s economic profit is:
A) the price of output minus the wage minus the rental price of capital.
B) revenue minus costs.
C) revenue plus capital costs.
D) the price of output minus labor costs.
Assume that a country experiences a reduction in productivity that lowers the marginal
product of labor for any given level of labor. In this case, the:
A) labor supply curve shifts to the right.
B) labor supply curve shifts to the left.
C) labor demand curve shifts upward and to the right.
D) labor demand curve shifts downward and to the left.
In the aggregate demand”aggregate supply model, long-run equilibrium occurs at the
combination of output and prices where:
A) aggregate demand is greater than long-run aggregate supply.
B) aggregate demand equals short-run aggregate supply.
C) aggregate demand equals short-run and long-run aggregate supply.
D) short-run aggregate supply equals long-run aggregate supply.
Of the five endogenous variables in the dynamic model of aggregate demand and
aggregate supply, which are the nominal variables that will change in long-run
equilibrium if the central bank changes its inflation target?
A) Yt, rt, and it
B) Yt, it, and Etpt + 1
C) pt, it, and Etpt + 1
D) rt, pt, and it
The construction of a new shopping center is an example of:
A) business fixed investment.
B) residential investment.
C) inventory investment.
D) financial investment.
Exhibit: IS”LM to Aggregate Demand
(Exhibit: IS“LM to Aggregate Demand) Based on the graph, which is the correct
ordering of the price levels and money supplies?
A) P1 > P2 and M1 > M2
B) P1 > P2 and M1 < M2
C) P1 < P2 and M1 > M2
D) P1 < P2 and M1 < M2
The inflation rate is a measure of how fast:
A) the total income of the economy is growing.
B) unemployment in the economy is increasing.
C) the general level of prices in the economy is rising.
D) the number of jobs in the economy is expanding.
Two policies that are intended to make the financial system more stable by restricting
the size of financial institutions are:
A) to offer cheaper loans to large financial institutions and to make larger capital
injections available for larger banks.
B) to lower the cost of deposit insurance for large banks and to provide incentives for
large banks to make speculative investments.
C) to restrict mergers among large banks and to require higher capital requirements for
large banks.
D) to allow large banks to be more highly leveraged and to increase deposit insurance
coverage for depositors at large banks.
If the money supply increases 12 percent, velocity decreases 4 percent, and the price
level increases 5 percent, then the change in real GDP must be ______ percent.
A) 3
B) 4
C) 9
D) 11
If the Federal Reserve wishes to increase the money supply, it should:
A) decrease the discount rate.
B) increase interest paid on reserves.
C) sell government bonds.
D) decrease the monetary base.
All of the following are requirements for reducing inflation without causing a recession
except:
A) workers and firms must form expectations rationally.
B) the plan must be announced before expectations are formed.
C) the plan must be believed by workers and firms.
D) the government’s budget must be balanced.
In an economy with flexible prices, competitive factor markets, and fixed supplies of
the factors of production, graphically illustrate the impact of an advance in technology
that greatly improves the productivity of capital, ceteris paribus. Be sure to label: i. the
axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift;
and v. the terminal equilibrium values. Explain in words how the equilibrium values
change.
You are hired as a consultant to set up the central bank of a new country. Suggest at
least two possible ways to structure the central bank to keep inflation levels low.
Two identical countries, Country A and Country B, can each be described by a
Keynesian-cross model. The MPC is 0.9 in each country. Country A decides to increase
spending by $2 billion, while Country B decides to cut taxes by $2 billion. In which
country will the new equilibrium level of income be greater?
Bob bought $5000 worth of Adobe Systems stock. This transaction was brokered by
John, who received $50 for his help. I think the $5000 should be included in GDP, and
the $50 should not be included in GDP. State whether I am right or wrong with an
explanation for your answer.
Given that the Philip curve defines an economy as where u is the
unemployment rate and p is the inflation rate, and the loss function which tells the
social cost of unemployment and inflation is
,calculate the optimal level of inflation for the economy.
If the money supply in Mexico is increasing much more rapidly than the money supply
in the United States, holding other factors constant, what would you predict will happen
to the nominal exchange rate between the Mexican peso and the United States dollar?
Explain.
The above figure is a basic representation of the Keynesian cross. Just by looking at the
graph, deduce the fundamental prerequisite condition for the Keynesian-cross model to
hold true.
What effect does advancement in technology have upon the equilibrium between real
rental price and capital (assuming supply of capital is fixed)?
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.
If, in a war condition, the capital stock falls rapidly, how can a country experience high
growth? Give an example.
Suppose that laws are passed banning labor unions and that resulting lower labor costs
are passed along to consumers in the form of lower prices. Use the aggregate
demand”aggregate supply model to illustrate graphically the impact in the short run and
the long run of this favorable supply shock. Be sure to label: i. the axes; ii. the curves;
iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run
equilibrium values; and vi. the long-run equilibrium values. State in words what
happens to prices and output in the short run and the long run.
Compare the impact of a tax cut on consumption, investment, output, and interest rates
in the classical model of Chapter 3 versus the IS“LM model.
Explain why government budget deficits crowd out private investment spending in a
closed economy, but crowd out net exports in a small open economy. Assume prices are
flexible and that factors of production are fully employed in both economies. Assume
there is perfect capital mobility for the small open economy.
How do credit card transactions affect the measurement of money?
What is the marginal product of capital (MPK), as shown with the Solow model?
Why was the recession of 2008-2009 sometimes also referred as the subprime crisis?
How does recession occur? What is a business cycle?
Fill in the blanks: As a dynamic response to demand shock in the short run, the DAD
curve shifts (say in period t) ___________, causing inflation to___________ and output
to ___________, while in next period (t+1) causing the aggregate supply curve to
__________ .
Use the model of dynamic aggregate demand and aggregate supply to graphically
illustrate the impact of a permanent increase in the central bank’s inflation target when
the economy is initially at long-run equilibrium. Explain the time path of output and
inflation in words.