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:
A) offset the depreciation of existing capital.
B) provide capital for new workers.
C) equal the marginal productivity of capital (MPK).
D) keep the level of capital per worker constant.
Advocates of the rational-expectations approach predict that a credible policy to lower
inflation will ______ the sacrifice ratio.
A) raise
B) lower
C) not change
D) sometimes raise and sometimes lower
To force politicians to judge whether government spending is worth the costs, some
economists have argued for:
A) a balanced-budget rule for fiscal policy.
B) a constant money-growth rule for monetary policy.
C) avoiding the assumption of any contingent liabilities.
D) the application of Ricardian equivalence.
If only unanticipated changes in the money supply affect real GDP, the public has
rational expectations, and everyone has the same information about the state of the
economy, then:
A) monetary policy can be used to systematically stabilize output.
B) monetary policy cannot be used to systematically stabilize output.
C) a policy of keeping the money supply constant is optimal.
D) a policy of adjusting the money supply in response to the state of the economy is
optimal.
In Irving Fisher’s two-period model, the income effect of an increase in the interest rate
in the first period for a saver is the:
A) decrease in the relative price of second-period consumption.
B) additional income earned on first-period saving.
C) decrease in the relative price of first-period consumption.
D) additional income earned on second-period saving.
Assume that the consumption function is given by C = 150 + 0.85(Y ” T) and the tax
function is given by T = t0 + t1Y. If t0 increases by 1 unit, then consumption:
A) decreases by 0.85 units.
B) decreases by 0.15 units.
C) increases by 0.15 units.
D) increases by 0.85 units.
Government tax policy can affect aggregate supply as well as aggregate demand,
because changes in taxes change the:
A) supply of money in the economy.
B) length of the inside lag of fiscal policy.
C) incentives to work and invest.
D) tradeoff between inflation and unemployment.
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:
A) the central bank raises the nominal and real interest rates in response to the increase
in inflation.
B) the higher prices generate a negative demand shock that reduces output.
C) the natural level of output falls in response to the increase in inflation.
D) the central bank increases the target rate of inflation in response to the increase in
inflation.
Currency equals:
A) M1.
B) the sum of funds in checking accounts.
C) the sum of checking accounts and paper money.
D) the sum of coins and paper money.
Beginning at long-run equilibrium in the dynamic model of aggregate demand and
aggregate supply, in the periods after a permanent reduction in the central bank’s
inflation target, the DAS shifts downward because:
A) the natural level of output increases in response to the lower rates of inflation.
B) the deviation of output from the natural level of output increases as a result of lower
rates of inflation.
C) lower rates of inflation generate negative supply shocks.
D) expectations of inflation decrease as a result of lower inflation in previous periods.
In the Solow growth model with population growth, but no technological progress, the
steady-state amount of investment can be thought of as a break-even amount of
investment because the quantity of investment just equals the amount of:
A) output needed to achieve the maximum level of consumption per worker.
B) capital needed to replace depreciated capital and to equip new workers.
C) saving needed to achieve the maximum level of output per worker.
D) output needed to make the capital per worker ratio equal to the marginal product of
capital.
In a steady-state economy with a saving rate s, population growth n, and
labor-augmenting technological progress g, the formula for the steady-state ratio of
capital per effective worker (k*), in terms of output per effective worker (f(k*)), is
(denoting the depreciation rate by d):
A) sf(k)/(d + n + g).
B) s/((f(k))( d + n + g)).
C) f(k)/((s)( d + n + g)).
D) (s ” f(k))/( d + n + g).
The LM curve, in the usual case:
A) is vertical.
B) is horizontal.
C) slopes down to the right.
D) slopes up to the right.
In equilibrium, total investment equals:
A) private saving.
B) public saving.
C) national saving.
D) household saving.
According to the model developed in Chapter 3, when government spending increases
without a change in taxes:
A) consumption increases.
B) consumption decreases.
C) investment increases.
D) investment decreases.
The economy of Miniland has an income of $400, consumption is $200, government
expenditure is $200, and the tax earnings of government is $150.
a. Calculate private saving.
b. Calculate public saving.
c. Calculate national saving.
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.
A) higher; higher
B) higher; lower
C) lower; lower
D) lower; higher
According to the quantity theory of money, if output is higher, ______ real balances are
required, and for fixed M this means ______ P.
A) higher; lower
B) lower; higher
C) higher; higher
D) lower; lower
Okun’s law is the ______ relationship between real GDP and the ______.
A) negative; unemployment rate
B) negative; inflation rate
C) positive; unemployment rate
D) positive; inflation rate
The costs of expected inflation cause productive resources of an economy to be directed
away from their efficient allocation. Explain how each of the following costs of
expected inflation distort the allocation of productive resources:
a. shoeleather costs
b. menu costs
c. the inconvenience of a changing price level
When bond traders for the Federal Reserve seek to decrease interest rates, they ______
bonds, which shifts the ______ curve to the right.
A) buy; IS
B) buy; LM
C) sell; IS
D) sell; LM
Which of the following is the most likely explanation of the August 2011 decision by
Standard and Poor’s to reduce its credit rating on U.S. government bonds?
A) A U.S. government debt default was not a likely outcome, but was a possibility to
occur in the short term.
B) The U.S. government budget deficit was too large.
C) Strategies to reduce predicted U.S. government future budget deficits did not appear
likely, making default a possibility.
D) Foreign governments were no longer willing to lend to the U.S. government.
In the Solow growth model with population growth, but no technological progress, in
the Golden Rule steady state, the marginal product of capital minus the rate of
depreciation will equal:
A) 0.
B) the population growth rate.
C) the saving rate.
D) output per worker.
Changes in monetary policy shift the:
A) LM curve.
B) planned spending curve.
C) money demand curve.
D) IS curve.
Assume two economies are identical in every way except that one has a higher saving
rate. According to the Solow growth model, in the steady state the country with the
higher saving rate will have ______ level of output per person and ______ rate of
growth of output per worker as/than the country with the lower saving rate.
A) the same; the same
B) the same; a higher
C) a higher; the same
D) a higher; a higher
Differences in factor accumulation and/or differences in production efficiency must
account for all international differences in:
A) human capital and physical capital.
B) saving rates and population growth rate.
C) income per person.
D) labor efficiency.
When studying the short-run behavior of the economy, an assumption of ______ is
more plausible, in contrast to studying the long-run equilibrium behavior of an
economy, when an assumption of ______ is more plausible.
A) inflation; unemployment
B) unemployment; inflation
C) flexible prices; sticky prices
D) sticky prices; flexible prices
According to the monetary policy rule (assuming qp> 0) when inflation increases, the
central bank increases the nominal interest rate by _____ the increase in the rate of
inflation, which _____ the real interest rate.
A) more than; increases
B) less than; decreases
C) an amount equal to; does not change
D) less than; increases
A given increase in taxes shifts the IS curve more to the left the:
A) larger the marginal propensity to consume.
B) smaller the marginal propensity to consume.
C) larger the government spending.
D) smaller the government spending.
Econoland finances government expenditures with an inflation tax.
a. Explain who pays the tax and how it is paid.
b. What are costs of the tax, assuming the tax rate is expected?
If increased immigration raises the labor force, the neoclassical theory of distribution
predicts:
A) the real wage will rise and the real rental price of capital will fall.
B) both the real wage and the real rental price of capital will fall.
C) both the real wage and the real rental price of capital will rise.
D) the real wage will fall and the real rental price of capital will rise.
Assume that GDP (Y) is 5,000. Consumption (C). is given by the equation C = 1,000 +
0.3(Y ” T). Investment (I) is given by the equation I = 1,500 ” 50r, where r is the real
interest rate in percent. Taxes (T) are 1,000 and government spending (G) is 1,500.
a. What are the equilibrium values of C, I, and r?
b. What are the values of private saving, public saving, and national saving?
c. Now assume there is a technological innovation that makes business want to invest
more. It raises the investment equation to I = 2,000 ” 50r. What are the new equilibrium
values of C, I, and r?
d. What are the new values of private saving, public saving, and national saving?