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ECO 302 Week 2 Quiz

Chapter 1

TRUE/FALSE

1. Macroeconomists study the amount of employment and unemployment.

2. Macroeconomists study the price of individual products like beer.

3. When the gross domestic product is growing, it is called inflation.

4. A recession is when GDP is falling toward a trough.

5. If price is below equilibrium in a market, then quantity supplied will be less than quantity demanded.

6. The annual inflation rate measures the annual percentage growth in the overall price level.

7. The annual inflation rate measures the growth in the prices of oil and food only.

8. Endogenous variables in an economic model are those that the model takes as given and does not try to explain.

9. Exogenous variables in an economic model are those that the model takes as given and does not try to explain.

10. In a model with perfect competition, both buyers and sellers take the price of a good as given.

MULTIPLE CHOICE

1. Macroeconomics deals with:
a. how individual markets work.
b. the overall performance of the economy.
c. relative prices in different markets.
d. substitution of one good for another good.

2. Macroeconomics includes the study of:
a. the general price level. c. the relative price of goods.
b. the price of individual goods. d. all of the above.

3. Macroeconomists study:
a. the determination of the economy’s total production.
b. unemployment
c. the general price level.
d. all of the above.

4. Macroeconomists study:
a. the determination of real GDP.
b. the production of specific goods.
c. the relative production in different markets.
d. all of the above.

5. Among the prices that macroeconomist study are:
a. the price of coffee. c. the interest rate.
b. the price of tea. d. all of the above.

6. Among the prices that macroeconomists study are:
a. the wage rate. c. the exchange rate.
b. the interest rate. d. all of the above.

7. Monetary policy involves:
a. the government’s expenditure. c. determining the quantity of money.
b. taxation. d. the fiscal deficit.

8. The unemployment rate is:
a. the fraction of the population with no job.
b. the fraction of those seeking work with no job.
c. the rate of growth of those with no job.
d. the rate of growth of those seeking work.

9. Fiscal policy involves:
a. determining exchange rates. c. interest rates.
b. government expenditures. d. all of the above.

10. The rate of growth of GDP for period t is:
a. c.
b. d.

11. Variations in real GDP are called:
a. inflation. c. economic fluctuations.
b. deflation. d. all of the above.

12. When GDP is expanding toward a high point it is called a[n]:
a. depression. c. recession.
b. boom. d. inflation.

13. When real GDP falls toward a low point or trough it is called a[n]:
a. boom. c. inflation.
b. recession. d. expansion.

14. During recessions the unemployment rate:
a. declines. c. is stable.
b. increases. d. is unmeasureable.

15. The unemployment rate in the US was highest in the:
a. 1990s c. 1980s
b. 1930s d. 1950s

16. The inflation rate for year t is:
a. c.
b. d.

17. A variable that macroeconomists want to model is a[n]
a. endogenous variable. c. exogenous variable.
b. dummy variable. d. predetermined variable.

18. A variable taken as given in a model is a[n]
a. endogenous variable. c. exogenous variable.
b. dummy variable. d. dichotomous variable.

19. The dollar price paid to use capital is known as:
a. the interest rate. c. the rental price of capital.
b. the exchange rate. d. the general price level.

20. The price of labor is the:
a. exchange rate. c. interest rate.
b. wage rate. d. the rental price.

Figure1.1

Price

21. In Figure1.1 the equilibrium price is:
a. 2 c. 7
b. 5 d. 0

22. In Figure1.1 the equilibrium quantity is
a. 5 c. 7
b. 2 d. 8

23. In Figure1.1 if price is 7, then
a. the market is in equilibrium. c. there is excess quantity demanded.
b. there is excess quantity supplied. d. the market clears.

24. In Figure1.1 if the price is 2, then:
a. the market is in equilibrium. c. there is excess quantity demanded.
b. there is excess quantity supplied. d. the market clears.

25. In Figure1.1, if price is 7, then quantity demanded is:
a. 2. c. 3.
b. 7. d. 8.

26. In Figure1.1, if price is 7, then quantity demanded is:
a. 2. c. 3.
b. 7. d. 8.

27. In Figure1.1, if price is 7, then quantity supplied is:
a. 2. c. 3.
b. 7. d. 8.

28. In Figure1.1, if price is 2, then quantity demanded is:
a. 2. c. 3.
b. 7. d. 8.

29. In Figure1.1, if price is 2, then quantity supplied is:
a. 2. c. 3.
b. 7. d. 8.

30. In Figure1.1, if price is 5, then quantity demanded is:
a. 2. c. 3.
b. 7. d. 5.

31. In Figure1.1, if demand falls, then equilibrium:
a. price and quantity fall. c. price falls and quantity rises.
b. price and quantity rise. d. prices rises and quantity falls.

32. In Figure1.1 if supply increases, then equilibrium:
a. price and quantity fall. c. price rises and quantity falls.
b. price and quantity rise. d. price falls and quantity rises.

33. A possible order of events in an economy over time is:
a. expansion, recession, peak, expansion. c. expansion, peak, trough, recession.
b. recession, trough, expansion, peak. d. recession, trough, peak, expansion.

34. A trough in an economy is when the economy:
a. is growing. c. is contracting.
b. reaches a low point. d. reaches a high point.

35. A peak in an economy is when the economy:
a. is growing. c. is contracting.
b. reaches a low point. d. reaches a high point.

36. A possible order of economic fluctuations is:
a. recession, boom, expansion, trough. c. recession, trough, expansion, peak.
b. expansion, recession, boom, trough. d. expansion, trough, recession, peak.

37. If prices are sticky:
a. the market quickly sticks at equilibrium. c. the market only slowly moves toward equilibrium.
b. the market clears quickly. d. all of the above.

38. In an economic model:
a. endogenous variables feed into a model to affect exogenous variable. c. exogenous and endogenous variables feed into the model.
b. exogenous variables feed into a model to affect endogenous variables. d. none of the above.

39. A price taker:
a. takes the price to the market. c. accepts the market price and decides whether and how much to buy or sell.
b. controls the market price. d. accepts the market quantity and sets price.

40. A macroeconomist would study the:
a. price of cars. c. the sales of beer.
b. the market for shoes. d. none of the above.

41. Since the late 1800s, U.S. GDP has followed
a. a general downward trend. c. a flat trend.
b. a general upward trend. d. no discernable trend.

42. An economic expansion ends when the economy
a. reaches a peak. c. begins a boom.
b. reaches a trough. d. begins a surge.

43. An economic recession ends when
a. the economy reaches a peak. c. unemployment reaches zero percent.
b. the economy reaches a trough. d. unemployment rises at a slow pace.

44. The unemployment rate measures
a. the number of people applying for unemployment insurance. c. the number of people in government welfare programs.
b. the percentage of people working at the minimum wage. d. the percentage of people seeking work who do not have a job.

45. The trend in the U.S. inflation rate since the 1970s has been
a. an increase in the rate. c. a decrease in the rate.
b. a decrease in the rate, followed by an increase in the rate. d. a steady trend, with no major change in the rate.

46. The changing rates of inflation in the U.S. mostly reflects changes in institutions such as
a. the gold standard. c. the U.S. tax code.
b. U.S. Federal Reserve policy. d. both (a) and (b).

47. In the past twenty-five years, the U.S. Federal Reserve mostly has pursued a policy of
a. low income tax rates. c. low and stable inflation.
b. low corporate tax rates. d. high required reserve rates.

48. An example of an exogenous variable in a macroeconomic model most likely would be
a. the level of employment. c. the weather.
b. the level of real GDP. d. the interest rate.

49. An example of an endogenous variable in a macroeconomic model most likely would be
a. the level of employment. c. the level of real GDP.
b. the existence of a war. d. either (a) or (c).

50. An example of an endogenous variable in a macroeconomic model most likely would be
a. the interest rate. c. the development of a new technology.
b. the existence of a war. d. natural disasters.

51. Which is NOT an example of an exogenous variable in a macroeconomic model?
a. the interest rate. c. the development of a new technology.
b. the existence of a war. d. natural disasters.

52. Macroeconomics uses microeconomic models
a. to model the level of real GDP. c. to model the market for coffee.
b. to model the decisions of individual households and businesses. d. in no circumstances.

53. In a macroeconomic model, the term disequilibrium refers to
a. a discrepancy between the quantities of labor supplied and demanded. c. a gap between the wages of unskilled and skilled workers.
b. a discrepancy between the quantities of coffee supplied and demanded. d. a gap between the level of real GDP in two cities.

54. In a macroeconomic model, the term disequilibrium refers to
a. the argument that some prices in the goods market are sticky. c. a gap between the wages of unskilled and skilled workers.
b. a discrepancy between the quantities of coffee supplied and demanded. d. a gap between the unemployment rate in two cities.

55. The new Keynesian approach argues that
a. the economy reflects perfect competion. c. individuals and businesses are mostly price-takers.
b. some prices are sticky and move only slowly. d. supply and demand in the goods market move prices quickly.

56. The new Keynesian approach argues that
a. individuals and businesses are mostly price-takers. c. sectors of the economy may be in disequilibrium for extended periods.
b. most prices are flexible and move quickly. d. supply and demand in the goods market move prices quickly.

57. The economist John Maynard Keynes argued that labor markets
a. are perfectly competitive. c. are usually in disequillibrium.
b. are usually at a point of disengagement. d. reflect rapid adjusment of wages to market conditions.

58. When a country follows a gold standard,
a. the price of gold is mostly constant. c. the price of gold varies quite a bit.
b. the price of silver is mostly constant. d. a central bank cannot also exist.

59. An exchange rate reflects
a. the sum of the values of two currencies. c. the relative levels of labor supply in two countries.
b. the rate at which one currency exchanges for another currency. d. the relative levels of capital in two countries.

60. In a macroeconomic model with perfect competition,
a. no individual buyer can noticeably affect the prices of goods. c. buyers can affect the prices of goods, but sellers cannot.
b. no individual seller can noticeably affect the prices of goods. d. both (a) and (b).

61. In a macroeconomic model with perfect competition,
a. there are many buyers and a few sellers. c. there are many buyers and sellers.
b. there are many sellers and a few buyers. d. there are few buyers and sellers.

62. A macroeconomic model which uses a microeconomic foundation will begin with
a. a microeconomic model, which is then aggregated to form a macroeconomic model. c. a macroeconomic model, which is then aggregated to form a microeconomic model.
b. a macroeconomic model, which is then disaggregated to form a microeconomic model. d. a gold standard model, which is then held exogenous to form a macroeconomic model.

63. An equilibrium price in a microeconomic model
a. shows where the quantity demanded is less than the quantity supplied. c. shows where disequilibrium occurs.
b. is a market-clearing price. d. shows where the quantity demanded is greater than the quantity supplied.

64. An equilibrium price in a microeconomic model
a. shows where the quantity demanded is less than the quantity supplied. c. occurs when there is no pressure for the price to rise or fall.
b. is a market-lowering price. d. shows where the quantity demanded is greater than the quantity supplied.

65. The number for employment refers to the number of
a. employers who have job openings. c. people looking for jobs.
b. adults in the population. d. people with jobs.

SHORT ANSWER

1. What types of economic issues do macroeconomists study?

2. How is the annual inflation rate calculated?

3. What is the rate of growth of real GDP?

4. Describe what happens when demand or supply increase in a market.

5. What are exogenous and endogenous variables?

6. Why are both flexible prices and sticky prices important to macroeconomic models?

ECO 302 Week 3 Quiz

Chapter 2

TRUE/FALSE

1. Nominal GDP measures the dollar value of all goods and services that an economy produces in a particular period of time.

2. GDP is a complete measure of economic welfare.

3. GDP ignores welfare changes due to environmental damage.

4. Value added is the difference between costs of production and the price of a product.

5. The difference between GDP and NNP is the depreciation of capital.

6. Nominal GDP measures the total value of goods and services, adjusted for inflation.

7. GDP in constant dollars uses prices from a base year, so that prices do not vary over time.

8. Business inventories are included in the GDP component of private domenstic investment.

9. A flow variable measures the dollar amount of goods at a specific point in time.

10. Conceptually, GDP measured by income, product, and value added each equal the same amount.

MULTIPLE CHOICE

1. Nominal GDP measures the:
a. dollar value of all goods and services produced in an economy at a point in time. c. dollar value of all goods and services produced in an economy during a specified time period.
b. the constant dollar value of all goods and services produced in an economy at a point in time. d. the constant dollar value of all goods and services produced in an economy during a specified time period.

2. Imputed rental income is:
a. the money people receive from renting property. c. what an owner occupied house would fetch on the market if the owner rented it.
b. the money businesses pay for renting property. d. the money businesses receive from renting property.

3. In an economy with two goods, beer and pizza, if pizza costs $10 per pie and beer costs $5 per six pack and if 100 six packs of beer and 200 pizzas are produced in a year, then nominal GDP that year would be:
a. $2,000. c. $1,500.
b. $2,500. d. none of the above.

4. In an economy with two goods, burgers and pizza, if pizza costs $15 per pie and burgers costs $5 per burger and if 1000 burger and 200 pizzas are produced in a year, then nominal GDP that year would be:
a. $24,000. c. $16,000.
b. $8,000. d. none of the above.

5. Real GDP is GDP:
a. in constant dollars. c. that considers income distribution.
b. in current dollars. d. that includes the value of leisure.

6. Real GDP equals:
a. nominal GDP times the implicit price level. c. the current dollar value of all goods and services produced in an economy during a particular time period.
b. nominal GDP divided by the implicit price level. d. real GDP time the implicit price level.

7. The implicit price level is:
a. the ratio of nominal to real GDP. c. the ratio of real to nominal GDP
b. the product of real and nominal GDP. d. the difference between real and nominal GDP.

8. If real GDP is 120 and nominal GDP is 180, then the implicit price level is:
a. .56. c. 60.
b. 1.5. d. 21600.

9. If real GDP is 200 and nominal GDP is 160, then the implicit price level is:
a. 0.8 c. 40.
b. 1.25 d. 32000.

10. GDP does not:
a. consider changes in the distribution of income. c. assign value to leisure time.
b. include most nonmarket goods. d. all of the above.

11. Personal consumption expenditure includes:
a. services. c. imports.
b. residential structures. d. all of the above.

12. Gross private domestic expenditure includes:
a. fixed investment. c. residential structures.
b. change in business inventory. d. all of the above.

13. Net exports of goods and services equals:
a. imports times exports. c. imports minus exports.
b. exports minus imports. d. all of the above.

14. Personal Consumption expenditure includes:
a. changes in business inventories. c. imports.
b. nondurables. d. all of the above.

15. Gross private domestic investment includes
a. durable goods. c. financial assets.
b. residential structures. d. all of the above.

16. Government purchases include:
a. state and local government purchases. c. federal government debt.
b. tax receipts. d. all of the above.

Table 2.1

Category of Expenditure Trillions of $

Personal Consumption Expenditure 7.5
Gross Private Domestic Investment 2.2
Government Purchases 2.5
Net Exports of Goods and Services -1.0
Depreciation of capital 0.5

17. Based on the data in Table 2.1, Gross Domestic Product is:
a. $11.7 trillion. c. $11.2 trillion.
b. $10.7 trillion. d. none of the above.

18. Based on the data in Table 2.1, net domestic private investment is:
a. $1.7 trillion. c. $11.0 trillion.
b. $2.7 trillion. d. none of the above.

19. Depreciation is:
a. when the price level falls. c. the capital used up producing this period’s output.
b. the economy goes into recession. d. all of the above.

Table 2.2

Category of Expenditure Trillions of $

Durable Goods 1.1
Fixed Investment 1.0
Federal Government Purchases 0.9
Exports 1.3
Nondurable Goods 2.6
Nonresidential Structures 1.3
State and Local Government 1.5
Imports 2.0
Services 5.2
Residential Structures 0.8
Changes in Business Inventories 2.0

20. Based on the data in Table 2.2, personal consumption expenditure is:
a. $3.7 trillion. c. $8.9 trillion.
b. $9.7 trillion. d. none of the above.

21. Based on the data in Table 2.2, gross private investment is:
a. $1.0 trillion. c. $5.1 trillion.
b. $4.3 trillion. d. none of the above.

22. Based on the data in Table 2.2, government purchases are:
a. $0.9 trillion. c. $0.6 trillion.
b. $2.4 trillion. d. none of the above.

23. Based on the data in Table 2.2, net exports of goods and services are:
a. $0.7 trillion. c. -$0.7 trillion.
b. $3.3 trillion. d. none of the above.

24. Based on the data in Table 2.2, gross domestic product is:
a. $17.7 trillion. c. $19.7 trillion.
b. $15.7 trillion. d. none of the above.

25. Based on the data in Table 2.2, net domestic product is:
a. $15.7 trillion. c. $19.7 trillion.
b. $17.7 trillion. d. none of the above.

26. Economists sometimes use a closed economy model despite the fact of trade with the rest of the world because:
a. the world as a whole is a closed economy. c. it simplifies the analysis.
b. at least for large countries like the US exports and imports have been small compared to GDP. d. all of the above.

27. Economists sometimes use a closed economy model because:
a. few countries actually trade with others. c. exports and imports have no effect on the economy.
b. it simplifies the analysis. d. all of the above.

Table 2.3

Type of Income Trillions of $

Compensation of employees 7.1
Proprietor’s income 0.9
Rental income of persons 0.1
Corporate profits 1.4
Net interest 0.5
Taxes on production 0.9
Subsidies 0.1
Business transfers 0.1
Surplus of government enterprises -0.1

28. Based on the data in Table 2.3, national income is:
a. $7.1 trillion. c. $11.0 trillion.
b. $10.8 trillion. d. none of the above.

29. Taxes on production include:
a. excise taxes. c. estate taxes.
b. income taxes. d. all of the above.

30. National income includes:
a. corporate taxes c. corporate profits.
b. corporate assets d. all of the above.

31. National income and GDP diverge in practice because of:
a. receipts and payments involving the rest of the world. c. taxes
b. subsidies. d. all of the above.

32. National income includes:
a. rental income of persons. c. corporate profits.
b. net interest. d. all of the above.

33. National income and GDP diverge in practice because of:
a. subsidies. c. taxes.
b. depreciation of capital. d. all of the above.

Table 2.4

Type of Product or Income Trillions of $

Gross domestic product (GDP) 12.5
Income receipts from the rest of the world 0.5
Depreciation of the capital stock 1.6
Corporate profits, taxes on production, contributions for social
insurance, net interest, business transfers, surplus of government
enterprises 3.6
Personal taxes 1.2
Income payments to the rest of the world 0.4
Personal income receipts on assets and personal transfer payments 3.0

34. Base on the data in Table 2.4, gross national product (GNP) is:
a. $11.4 trillion. c. $12.5 trillion.
b. $12.6. trillion. d. none of the above.

35. Based on the data in Table 2.4, net national product is:
a. $11.0 trillion. c. $12.6 trillion.
b. $11.4 trillion. d. none of the above.

36. Based on the data in Table 2.4, national income is:
a. $7.4 trillion. c. $8.9 trillion.
b. $11.0 trillion. d. none of the above.

37. Based on the data in Table 2.4, personal income is:
a. $10.2 trillion. c. $11.8 trillion.
b. $10.4 trillion. d. none of the above.

38. Based on the data in Table 2.4, disposable personal income is:
a. $10 trillion. c. $9.2 trillion.
b. $7.4 trillion. d. none of the above.

39. Gross national product (GNP) is gross domestic product (GDP):
a. less income receipts from the rest of the world less income payments to the rest of the world. c. plus income receipts from the rest of the world less income payments to the rest of the world.
b. less income receipts from the rest of the world plus income payments to the rest of the world. d. less income receipts from the rest of the world less income payments to the rest of the world.

40. Net national product (NNP) is gross national product (GNP):
a. plus depreciation of capital. c. plus personal taxes.
b. less depreciation of capital. d. less personal taxes.

41. Personal income is national income:
a. less corporate profits, taxes on production, contributions for social insurance, net interest, business transfers and surplus of government enterprises plus personal income receipts on assets and personal transfer payments. c. plus corporate profits, taxes on production, contributions for social insurance, net interest, business transfers and surplus of government enterprises less personal income receipts on assets and personal transfer payments.
b. less corporate profits, taxes on production, contributions for social insurance, net interest, business transfers, surplus of government enterprises, personal income receipts on assets and personal transfer payments. d. plus corporate profits, taxes on production, contributions for social insurance, net interest, business transfers, surplus of government enterprises, personal income receipts on assets and personal transfer payments.

42. Disposable personal income is personal income:
a. plus personal taxes. c. less personal taxes.
b. less corporate profits, taxes on production, contributions for social insurance, net interest, business transfers and surplus of government enterprises plus personal income receipts on assets and personal transfer payments. d. plus corporate profits, taxes on production, contributions for social insurance, net interest, business transfers and surplus of government enterprises less personal income receipts on assets and personal transfer payments.

43. Subtracted from national income to get personal income is:
a. depreciation of capital. c. personal transfer payments.
b. corporate profits. d. all of the above.

44. Added to national income to get personal income is:
a. personal income receipts on assets. c. contributions for social insurance.
b. net interest. d. all of that above.

45. Subtracted from national income to get personal income is:
a. net interest. c. taxes on production.
b. business transfers. d. all of the above.

46. Subtracted from personal income to get disposable personal income is:
a. personal taxes. c. personal income receipts on assets.
b. contributions for social insurance. d. all of the above.

47. The consumer price index (CPI):
a. can not be constructed as a chained index. c. is updated whenever new goods are introduced.
b. does not adjust for quality changes in goods. d. fully accounts for substitution to cheaper goods.

48. The consumer price index is biased because it can not account for:
a. quality changes in goods. c. people substituting to cheaper goods.
b. new goods. d. all of the above.

49. The consumer price index does not account for:
a. the introduction of new goods. c. goods whose prices fall.
b. goods whose prices rise. d. all of the above.

50. The consumer price index is constructed from:
a. tax data. c. data from wholesale producers.
b. survey data. d. all of the above.

51. Nominal GDP can be misleading primarily because it
a. does not include imputed rental income. c. is adjusted for inflation.
b. depends on the overall level of prices. d. does not include personal consumption expenditures.

52. Which of the following would NOT be included in this year’s GDP?
a. the sale of a new 4-door sedan car to a consumer. c. the sale of an antique automobile to a antique-car collector.
b. the sale of a new computer to a student. d. the sale of a new SUV to a consumer.

53. Which of the following would be included in this year’s GDP?
a. the sale of a new car. c. the sale of an existing home.
b. the sale of a used car. d. the sale of an antique table.

54. In the calculation of real GDP, a base year is used for measuring
a. rental income. c. production quantities.
b. wages. d. prices.

55. The chain-weighted measure of GDP
a. uses average prices of goods for two adjacent years. c. uses the current prices of goods.
b. uses the price of goods in a base year, such as the year 2000. d. gives more weight to goods which are more expensive.

56. A chain-weighted measure of GDP addresses the issue of changes in
a. product quality. c. the chain of supply for goods.
b. the average weight of goods. d. the quantity of exports and imports.

57. When the quality of a product changes over time, real GDP
a. cannot be adjusted for this problem. c. can be adjusted by using a chain-weighted measure of GDP.
b. can be adjusted by choosing a new base year each decade. d. can be adjusted by subtracting depreciation from nominal GDP.

58. If nominal GDP is 200 and the implicit price level is 1.25, then real GDP
a. equals 250. c. equals 160.
b. equals 201.25 d. cannot be calculated.

59. If nominal GDP is 300 and the implicit price level is 0.75, then real GDP
a. equals 400. c. equals 225.
b. equals 300. d. cannot be calculated.

60. If real GDP equals 400 and the implicit price level is 0.75, then nominal GDP
a. equals 400. c. equals 225.
b. equals 300. d. cannot be calculated.

61. If real GDP equals 400 and the implicit price level is 1.25, then nominal GDP
a. equals 320. c. equals 500.
b. equals 400. d. cannot be calculated.

62. One shortcoming of real GDP is that it
a. excludes most nonmarket activity. c. does not consider price changes.
b. does not consider income distribution. d. (a) and (b).

63. Which of the following is NOT classified as a consumer durable?
a. automobiles. c. refrigerators.
b. furniture. d. none of the above.

64. Seasonal adjustment to macroeconomic data corrects mostly for
a. price level changes. c. the weather and holidays.
b. product quality changes. d. the housing industry cycle.

65. The sum of value added from all sectors in an economy is equal to
a. national income. c. net national product.
b. GDP. d. (a) and (b).

66. A pottery shop buys clay and other materials for $20. Workers use the materials to make 5 bowls that are sold for $250 total. The value added by the pottery shop equals
a. $0. c. $30.
b. $20. d. $230.

SHORT ANSWER

1. What is nominal gross domestic product (GDP)?

2. What is real GDP and what makes it “real?”

3. What is the relationship between nominal and real GDP?

4. What parts of welfare does real GDP not measure?

5. Why might the consumer price index (CPI) overstate inflation?

6. Why should GDP measured by expenditures and by income each equal the same amount? Why, in practice, are they often not equal?

Chapter 3

TRUE/FALSE

1. The standard of living of people in a country is their per capita income.

2. Diminishing returns to labor implies that eventually the marginal product of labor will become negative.

3. The marginal product of capital is how much output changes when capital increases by one unit.

4. Saving is income that is not consumed.

5. Real saving equals gross investment.

6. Data show that, from 1960 to 2000, the U.S. and other OECD countries grew at moderate rates.

7. Data from recent decades show that most countries in sub-Saharan Africa grew at a fast pace.

8. In a production function for the economy, the marginal product of capital typically is increasing.

9. Constant returns to scale in a production function imply that doubling both capital and labor will also double output.

10. The Solow growth model indicates that the growth rate of real GDP per worker depends partly on the saving rate.

MULTIPLE CHOICE

1. World growth data shows that from 1960 to 2000:
a. the US and other OECD countries grew at moderate rates. c. some countries particularly East Asian countries grew rapidly.
b. sub-Saharan African countries grew at low rates or declined. d. all of the above.

2. World growth data reveals that from 1960 to 2000:
a. the US and other OECD countries grew at moderate rates. c. some countries particularly East Asian countries grew a low rates or declined.
b. sub-Saharan African countries grew rapidly. d. all of the above.

3. World growth data reveals that from 1960 to 2000:
a. the US and other OECD countries stagnated. c. some countries particularly East Asian countries grew at low or negative rates.
b. sub-Saharan African countries grew at low or negative rates. d. all of the above.

4. World growth data reveals that from 1960 to 2000:
a. all countries grew at similar rates. c. some countries particularly East Asian countries grew rapidly.
b. sub-Saharan African countries grew moderately. d. the US and other OECD countries stagnated.

5. The US and other OECD countries had high levels of GDP per person in 2000 despite growing at a moderate rate from 1960 to 2000 because:
a. of exploitation of foreign countries. c. they stole the wealth of less developed countries.
b. their economies had grown at a moderate rate for a century or more. d. all of the above.

6. If A in the production function Y = A • F(K,L) rises, then:
a. output rises for any level of K and L. c. the marginal product of capital rises.
b. the marginal product of labor rises. d. all of the above.

7. If A in the production function Y = A • F(K,L) doubles, while K and L remain the same, then
a. output doubles. c. the marginal product of capital falls.
b. the marginal product of labor falls. d. output increases by less than double.

8. A in the production function Y = A • F(K,L) is:
a. the marginal product of labor. c. the marginal product of capital.
b. the capital to labor ratio (K/L). d. the level of technology.

9. The marginal product of labor is:
a. how much output rises for when labor increases one unit. c. labor divided by capital (L/K)
b. capital divided by labor (K/L). d. the level of technology.

10. The marginal product of capital is:
a. . c. the slope of the production when technology and labor are held constant.
b. the change in output for a unit change in capital. d. all of the above.

11. Diminishing marginal product of capital (MPK) means:
a. output rises as capital rises. c. output rises as the MPK rises.
b. the MPK eventually falls as capital rises. d. the marginal product of capital eventually becomes negative as capital rises.

12. In the production function Y = A • F(K,L), L is:
a. leisure. c. the marginal product of labor.
b. labor. d. the marginal product of leisure.

13. In the production function Y = A • F(K,L), Y is:
a. good Y. c. the marginal product of good Y.
b. production. d. constant returns to scale.

14. Among the assumptions made about the production function Y = A • (K,L) is:
a. diminishing marginal product of labor. c. diminishing marginal product of capital.
b. constant returns to scale. d. all of the above.

15. For the production function Y = A • F(K,L) constant returns to scale means:
a. if capital and labor double output doubles. c. the marginal products of capital and labor are constant.
b. capital and labor increase at a constant rate. d. technology is constant.

16. If the production function Y = A • (K,L) is divided by L, then
a. (Y/L) = A•f(K/L). c. y = A•f(k).
b. output per capita equals technology times a function of the capital labor ratio. d. all of the above.

17. Among the categories the growth rate is broken down into by growth accounting is:
a. the growth rate of technology. c. the capital labor ratio.
b. the marginal product of capital. d. all of the above.

18. Growth accounting shows that GDP growth depends on:
a. growth of the capital stock. c. government purchases.
b. holding environmental pollution in check. d. having a reasonable distribution of income.

19. Growth accounting shows that economic growth depends on:
a. government tax receipts. c. lowering environmental pollution.
b. the growth of the labor force. d. all of the above.

20. Growth accounting shows that economic growth depends on:
a. controlling environmental pollution. c. increases in technology.
b. international cooperation. d. all of the above.

21. Growth accounting shows that economic growth depends on:
a. increases in technology. c. growth in the capital stock.
b. the growth of the labor force. d. all of the above.

22. The growth accounting formula is:
a. c.
b. d. Y= A • F(K,L)

23. The labor force participation rate is:
a. the labor force divided into population. c. the labor force times population.
b. the labor force divide by population. d. the labor population minus the labor force.

24. If a country has a population of 100 million and a labor force of 60 million, then its labor force participation rate is:
a. 0.6. c. 40 million.
b. 1.67 d. 60 million.

25. If a country has a population of 300 million and a labor force of 200 million, then its labor force participation rate is:
a. 0.67 c. 100 million.
b. 1.5 d. 200 million.

26. The change in the capital stock in an economy depends on:
a. the economy’s saving. c. the economy’s investment.
b. the change in bond prices. d. all of the above.

27. In a closed economy with no government sector, the change in the capital stock is:
a. net investment less depreciation. c. gross investment.
b. gross investment less depreciation. d. nominal saving.

28. In a closed economy with no government sector, the change in the capital stock is equal to:
a. net investment less depreciation. c. gross investment.
b. nominal saving. d. real saving.

29. Depreciation of the capital stock occurs due to:
a. machines deteriorating. c. bonds falling in value.
b. real estate rising in value. d. all of the above.

30. Depreciation of the capital stock occurs due to:
a. inflation. c. bonds falling in value.
b. buildings needing repair. d. all of the above.

31. Depreciation of the capital stock occurs due to:
a. deflation. c. bonds falling in value.
b. vehicles requiring new parts. d. all of the above.

32. Depreciation of the capital stock occurs due to:
a. machines deteriorating. c. buildings needing repair.
b. vehicles needing parts. d. all of the above.

33. If there are 120 machines in an economy and the depreciation rate is 5% per year, then:
a. depreciation is 5 machines a year. c. depreciation is 115 machines per year.
b. depreciation is 6 machines a year. d. depreciation is 114 machines per year.

34. If there are 120 machines in an economy and the depreciation rate is 10% per year, then next year there are:
a. 10 of the original machines left. c. 108 of the original machines left.
b. 12 of the original machines left. d. 110 of the original machines left.

35. The average product of capital is:
a. c. .
b. Y/K. d. .

Figure 3.1

36. In Figure 3.1 the average product of capital is:
a. rising. c. falling.
b. constant. d. unknown.

37. In Figure 3.1 the marginal product of capital is:
a. rising. c. constant.
b. declining. d. unknown.

38. Figure 3.1 shows:
a. a production function with labor and technology constant. c. a production function with capital and technology constant.
b. a production function with capital and labor constant. d. a production function with capital, labor and technology constant.

39. In the steady state of the Solow growth model:
a. c.
b. d.

40. In the Solow growth model the economy reaches the optimal k*:
a. immediately. c. randomly.
b. over a period of time. d. cyclically.

41. The Solow growth model assumes unemployment is:
a. zero. c. rising.
b. falling. d. constant.

42. The Solow growth model ignores:
a. the international sector. c. changes in labor force participation.
b. the role of government. d. all of the above.

43. The Solow growth model shows that the growth rate of real GDP per worker depends on:
a. the saving rate, s c. the depreciation rate, .
b. the growth rate of the labor force, n. d. all of the above.

44. The Solow growth model shows that the growth rate of real GDP per worker depends on:
a. the saving rate, s c. the rate of inflation.
b. government spending, G. d. all of the above.

45. The Solow growth model shows that the growth rate of real GDP per worker depends on:
a. the rate of growth of the money supply. c. rate of growth of government debt.
b. the growth rate of the labor force, n. d. all of the above.

46. The Solow growth model shows that the growth rate of real GDP per worker depends on:
a. the rate of growth of the money supply. c. the depreciation rate, .
b. level of output in the economy. d. all of the above.

47. In the Solow growth model the optimal capital to labor ratio, K/L, is where:
a. s + n = s•(k/y). c. n + s = s•(y/k).
b. s + n = s•(y/k). d. s + s = n•(y/k).

48. In the Solow growth model the steady state is when the economy has:
a. full employment. c. zero inflation.
b. the optimal capital labor ratio, k*. d. all of the above.

49. During the transition to the steady state in the Solow growth model:
a. the output per worker rises. c. the rate of growth of capital rises.
b. labor force participation rises. d. all of the above.

50. During the transition to the steady state in the Solow growth model:
a. the output per worker falls. c. the rate of growth of capital falls.
b. labor force participation rises. d. all of the above.

51. During the transition to the steady state in the Solow growth model:
a. the output per worker rises. c. the rate of growth of capital falls.
b. the capital to labor ratio rises. d. all of the above.

52. The Solow residual is:
a. that part of output growth not attributed to labor force growth. c. that part of output growth not attributed to capital stock growth and labor force growth.
b. that part of output growth not attributed to capital stock growth. d. the growth in output.

53. The Solow residual is that part of output growth attributed to:
a. the growth rate of the labor force. c. the growth rate of the capital stock.
b. the growth rate of output. d. the grow rate of technology.

54. The Solow residual:
a. is not directly observable. c. is attributed to capital stock growth.
b. attributed to labor force growth. d. is attributed to labor force growth and capital stock growth.

55. Economists use the term poverty to identify people who
a. earn less than $5,000 per year. c. have no access to the internet at home.
b. earn less than $6,000 per year. d. have difficulty affording food and shelter.

56. In economics, the term inequality describes
a. the same thing as poverty. c. an unequal representation in the U.N.
b. an unequal distribution of income. d. disparity among countries’ voting rights.

57. Data from recent decades show that economic growth led to
a. a worldwide increase in poverty. c. an increase in poverty in OECD countries only.
b. no signficant change in poverty. d. a worldwide decline in poverty.

58. Data from recent decades show that economic growth led to
a. a worldwide increase in inequality. c. an decrease in inequality in China only.
b. no signficant change in inequality. d. a worldwide decrease in inequality.

59. The world distribution of real GDP per person in 2000 shows that
a. OECD countries dominate the bottom of the distribution. c. sub-Saharan African countries dominate the bottom of the distribution.
b. OECD countries dominate the top of the distribution. d. both (b) and (c).

60. The world distribution of real GDP per person in 2000 shows that
a. OECD countries dominate the bottom of the distribution. c. sub-Saharan African countries dominate the top of the distribution.
b. OECD countries dominate the top of the distribution. d. both (b) and (c).

61. The slope of a production function in terms of capital, holding technology and labor fixed, usually
a. increases with increases in capital. c. decreases with increases in capital.
b. remains constant with increases in capital. d. either (a) or (b).

62. The slope of a production function in terms of labor, holding technology and capital fixed, usually
a. decreases with increases in labor. c. increases with increases in labor.
b. remains constant with increases in labor. d. either (a) or (b).

63. A bakery with a production function exhibiting constant returns to scale has 2 mixers and 4 workers, who produce 10 cakes per day. If the bakery owner adds 2 more mixers and 4 more workers, then production would most likely
a. increase by 10 cakes per day. c. decrease by 2 cakes per day.
b. increase by 40 cakes per day. d. increase by 60 cakes per day.

64. In the Solow model, the growth rate of the capital stock is a function of
a. the saving rate and the depreciation rate. c. the labor force participation rate and the technology growth rate.
b. the saving rate and the labor force participation rate. d. the depreciation rate and the labor force participation rate.

65. In the Solow model, the growth rate of the labor is a function of
a. the saving rate and the growth rate of the population. c. the labor force participation rate and the health technology growth rate.
b. the saving rate and the labor force participation rate. d. the growth rate of the population.

66. In the Solow growth model, the average product of capital
a. increases as capital per worker rises. c. declines as capital per worker rises.
b. remains constant as capital per worker rises. d. declines, then rises, as capital per worker rises.

67. In the steady state for the Solow growth model,
a. the labor per technology unit ratio increases. c. the capital per worker ratio increases.
b. the labor per technology unit ratio no longer moves. d. the capital per worker ratio no longer moves.

68. In the steady state for the Solow growth model, the saving per worker
a. is greater than the capital provided for each new worker. c. is equal to the depreciation rate per worker.
b. is equal to the capital provided for each new worker. d. is greater than the depreciation rate per worker.

SHORT ANSWER

1. What is a production function?

2. What do constant returns to scale imply?

3. What is the growth account formula and what does it tell us?

4. Show why real saving equals net investment.

ECO 302 Week 4 Quiz

Chapter 4

TRUE/FALSE

1. An increase in the depreciation rate affects the steady-state capital per worker the same way as an increase in the population growth rate.

2. If the saving rate increases, then the optimum level of capital per worker falls.

3. An increase in technology causes the optimum level of capital per worker to rise in the long run or steady state.

4. An increase in technology causes the real GDP per worker to increase during the transition to the steady-state.

5. An increase in technology cause the growth in real output per worker to be higher in the long run or steady-state.

6. An increase in the saving rate causes the growth in real output per worker to be lower in the long run or steady-state.

7. The Solow model of growth says that poorer economies should over time converge towards richer ones in terms of real output put worker.

8. In the long run or steady state of the Solow model, the growth rate of capital per worker is higher with a higher saving rate.

9. An increase in the population growth rate in the Solow model causes the growth in output per worker to be higher in the long run or steady-state.

10. An increase in the population growth rate in the Solow model causes output per worker to be lower in the long run or steady-state.

MULTIPLE CHOICE

1. In the revised version of the Solow growth model the optimal level of capital stock per worker depends on:
a. the saving rating. c. population growth rate.
b. the depreciation rate. d. all of the above.

2. In the revised version of the Solow growth model the optimal level of the capital stock per worker depends on:
a. monetary growth. c. the saving rate.
b. government spending. d. all of the above.

3. In the revised version of the Solow growth model the optimal level of the capital stock per worker depends on:
a. monetary growth. c. appreciation in the stock market.
b. the depreciation rate. d. all of the above.

4. In the revised version of the Solow growth model the optimal level of the capital stock per worker depends on:
a. the population growth rate. c. inflation.
b. government spending. d. all of the above.

5. In the Solow growth model as a growing economy transitions to the steady state:
a. the average product of capital falls. c. the average product of labor falls.
b. output per worker is constant. d. the growth rate of capital is equal to zero.

6. In the Solow growth model in the steady state the growth rate of capital per worker, k*, is:
a. rising. c. fluctuating.
b. falling. d. zero.

7. In the Solow growth model, if technology, A, improves, then in the steady state:
a. output per worker grows faster. c. capital per worker grows faster.
b. output per worker grows at the same rate, zero. d. all of the above.

8. In the Solow growth model, if the population growth rate, n, increases, then in the steady state:
a. output per worker grows slower. c. capital per worker grows at the same rate, zero.
b. capital per worker grows slower. d. all of the above.

9. In the Solow growth model, if the depreciation rate, , increases, then in the steady state:
a. output per worker grows at the same rate, zero. c. capital per worker grows faster.
b. output per worker grows faster. d. all of the above.

10. In the Solow growth model, if labor input, L(0), increases, then in the steady state:
a. output per worker grows faster. c. capital per worker grows faster.
b. capital per worker grows at the same rate, zero. d. all of the above.

11. In the Solow growth model in the steady state the growth rate of output per worker, y*, is:
a. rising. c. constant at zero.
b. falling. d. fluctuating.

12. If the saving rate increases in the Solow growth model, then during the transition to the steady state:
a. the growth rate of capital per worker will increase. c. the growth rate of capital per worker is constant.
b. the growth rate of capital per worker will decrease. d. the growth rate of capital per worker is zero.

13. If the saving rate increases in the Solow growth model, then in the steady state the growth rate of capital per worker is:
a. constant. c. zero.
b. unchanged. d. all of the above.

14. If the saving rate increases in the Solow growth model, then in the steady state the growth rate of capital per worker is:
a. higher. c. lower.
b. unchanged. d. rising.

15. If the level of technology increases in the Solow growth model, then in the steady state, the growth rate of capital per worker is:
a. higher. c. lower.
b. unchanged. d. rising.

16. If the saving rate increases in the Solow growth model, then in the steady state:
a. capital per worker and the growth of capital will be higher. c. capital per worker will be higher but the growth rate of capital will be lower.
b. capital per worker will be higher but the growth rate of capital will remain the same at zero. d. capital per worker will be lower but the growth rate of capital will be higher.

17. If the level of technology increases in the Solow growth model, then in the steady state
a. capital per worker and the growth of capital will be higher. c. capital per worker will be higher but the growth rate of capital will be lower.
b. capital per worker will be higher but the growth rate of capital will remain the same at zero. d. capital per worker will be lower but the growth rate of capital will be higher.

18. If the level of technology increases in the Solow growth model, then in the steady state
a. capital per worker will be higher. c. the growth rate of capital will be lower.
b. saving per worker will be higher. d. capital per worker will be the same.

19. If the level of technology increases in the Solow growth model, then in the steady state
a. capital per worker will be higher. c. the growth rate of capital will be lower.
b. output per worker will be higher. d. both (a) and (b).

20. If the saving rate increases in the Solow growth model, then in the steady state
a. capital per worker will be higher. c. the growth rate of capital will be zero.
b. output per worker will be higher. d. all of the above.

21. If the level of technology increases in the Solow growth model, then in the steady state
a. output per worker will be higher. c. the growth rate of capital will be zero.
b. capital per worker will be higher. d. all of the above.

22. In the Solow growth model during the transition an increase in technology:
a. lowers the growth rate of capital per worker. c. raises the growth rate of capital per worker.
b. does not change the growth rate of capital per worker. d. causes the growth rate of capital to fall to zero per worker.

23. In the Solow growth model during the transition an increase in technology:
a. lowers the growth rate of output per worker. c. raises the growth rate of output per worker.
b. does not change the growth rate of output per worker. d. causes the growth rate of output per worker to fall to zero.

24. In the Solow growth model during the transition an increase in technology:
a. lowers the growth rate of capital and output per worker. c. raises the growth rate of capital and output per worker.
b. raises the growth rate of capital per worker and lowers the growth rate of output per worker. d. lowers the growth rate of capital per worker and raises the growth rate of output per worker.

25. In the Solow growth model in the short run, an increase in the labor input L(0):
a. increases the growth rate of real output per worker. c. reduces the growth rate of capital per worker.
b. increases s•(y/k). d. decreases s + n.

26. In the Solow growth model in the short run, an increase in the labor input L(0),
a. decrease the growth rate of real output per worker. c. increase the growth rate of capital per worker.
b. increases s•(y/k). d. decrease s + n.

27. In the Solow growth model in the long run or steady state, an increase in the labor input L(0) will,
a. increase the capital stock. c. not affect real output per worker.
b. lead to a growth of the capital stock per worker of zero. d. all of the above.

28. In the Solow growth model in the long run or steady state, an increase in the labor input L(0) will,
a. decrease the capital stock. c. not change real output per worker.
b. lead to a positive growth of the capital stock per worker. d. all of the above.

Figure 4.1

Determinants
of k/k

29. In Figure 4.1 the distance between s•(y/k) and s + n is the growth of capital per worker:
a. in the transition. c. in the steady state.
b. in the long-run. d. none of the above.

30. In Figure 4.1 if the saving rate increases, then
a. the curve s + n increases. c. the curve s + n decreases.
b. the curve s + n becomes steeper. d. the curve s + n becomes flatter.

31. In Figure 4.1, if the saving rate increase, then:
a. s•(y/k) increases. c. s•(y/k) decreases.
b. s•(y/k) gets steeper. d. s•(y/k) becomes vertical.

32. In Figure 4.1, if the saving rate increase, then:
a. s•(y/k) and s + n increase. c. s•(y/k) and s + n decrease.
b. s•(y/k) increases while s + n decreases. d. s•(y/k) decreases while s + n increase.

33. In Figure 4.1, if the technology improves, then:
a. s•(y/k) increases. c. s•(y/k) decreases.
b. s + n increases. d. s + n decreases.

34. In Figure 4.1, if the initial amount of labor increases, then:
a. s•(y/k) increases. c. s + n increases.
b. K/L moves away from the optimum. d. the growth rate of population increases.

35. In Figure 4.1, if the initial amount of labor increases, then in the steady state:
a. the growth rate of capital per worker increases. c. the growth rate of output per worker is the same.
b. the growth rate of output per worker rises. d. the population growth rate rises.

36. In Figure 4.1, if the initial amount of labor increases, then during the transition to they steady state:
a. the growth rate of capital per worker and output per worker increase. c. the growth rate of capital per worker increases and output per worker decrease.
b. the growth rate of capital per worker and output per worker.decrease. d. the growth rate of capital per worker decreases and output per worker increases.

37. In Figure 4.1, if the population growth rate increases, then:
a. s•(y/k) increases. c. s + n increases.
b. K/L moves away from the optimum. d. the initial amount of labor increases.

38. In Figure 4.1, an increase in productivity:
a. raises the steady state growth rate of capital per worker. c. lowers the steady state growth rate of output per worker
b. does not change steady-state growth rates of output or capital per worker. d. lowers the steady-state level of capital.

39. In Figure 4.1, an increase in the depreciation rate has the same effects as:
a. an increase in the savings rate. c. an increase in the population growth rate.
b. an increase in the initial amount of labor. d. all of the above.

40. In Figure 4.1, an increase in technology:
a. increases s•(y/k) c. increases s + n.
b. decreases s•(y/k) d. decreases s + n.

41. In Figure 4.1, an increase in technology:
a. increases k*. c. decreases k*.
b. does not affect k*. d. makes k* zero.

42. In Figure 4.1, an increase in the population growth rate:
a. increases k*. c. decreases k*.
b. does not affect k*. d. makes k* zero.

43. In Figure 4.1, an increase in the depreciation rate:
a. increases k*. c. decreases k*.
b. does not affect k*. d. makes k* zero.

44. In Figure 4.1, if the technology improves, then:
a. the steady-state capital stock increases. c. the steady-state growth in output per worker increases.
b. the steady-state growth in capital per worker increases. d. the population growth rate increases.

45. Convergence of economies is the tendency according to the Solow growth model for:
a. richer countries to buy up all the capital in poorer countries. c. poorer economies to grow faster in terms of real GDP per capita than richer countries.
b. richer countries to tend decline as pollution damage increases. d. the tendency for richer economies to shrink to the size of poorer economies.

46. Since 1960 the data show a tendency of output per worker to converge:
a. in all countries in the world. c. in OECD countries.
b. countries with different savings rates. d. none of the above.

47. The data show a tendency of output per worker to converge:
a. among US States from 1880 to 2000. c. in OECD countries from 1960 to 2000.
b. countries with similar economies. d. all of the above.

48. Convergence will not happen if economies around the world have:
a. different saving rates. c. different population growth rates.
b. different technologies. d. all of the above.

49. Convergence will not happen if economies around the world have:
a. different saving rates. c. different levels out labor input.
b. different average products of capital in the transition. d. all of the above.

50. Convergence will not happen if economies around the world have:
a. different capital labor ratios in during the transition. c. different levels out labor input.
b. different population growth rates. d. all of the above.

51. Convergence will not happen if economies around the world have:
a. different average products of capital during the transition. c. different levels of technology.
b. different initial levels of labor input. d. all of the above.

52. Convergence will not happen if economies around the world have:
a. different average products of capital during the transition. c. different optimum levels of capital per worker, k*.
b. different initial levels of labor input. d. all of the above.

53. Economies are said to have converged if they:
a. have the same growth rate in the transition. c. have the same saving rate.
b. have the same capital per worker, k*, in the steady state. d. all of the above.

54. When converging economies:
a. have the same growth rate of capital per worker. c. have the same growth rate of output per worker.
b. the same steady state capital per worker, k*. d. all of the above.

55. Convergence will not happen if economies around the world have:
a. different savings rates. c. different optimum levels of capital per worker, k*.
b. different population growth rates. d. all of the above.

56. Convergence will not happen if economies around the world have:
a. different capital per worker growth rates in the transition. c. different initial starting points.
b. different initial levels of labor input, L(0). d. none of the above.

57. If the savings rate increases in the Solow growth model, then during the short run transition to the steady state,
a. the growth rate of capital per worker increases. c. the depreciation rate of capital per worker increases.
b. the growth rate of the population decreases. d. the growth rate of capital per worker to equal zero.

58. A major influenza pandemic which led to many deaths would have what effect on the Solow growth model?
a. It would decrease the level of technology. c. It would decrease the depreciation rate.
b. It would decrease the labor force. d. It would increae the level of technology.

59. Suppose that Canada experiences a large migration of Mexicans to Canada. The effect on the Solow growth model would be to
a. decrease the level of technology. c. decrease the saving rate.
b. increase the labor force. d. increae the level of technology.

60. If the initial level of labor increases, but the population growth rate does not change, then the
a. initial capital per worker decreases, c. initial capital per worker remains zero.
b. initial capital per worker increases. d. initial growth rate of capital per worker decreases.

61. If the initial level of labor increases, but the population growth rate does not change, then the
a. initial growth rate of capital per worker decreases. c. initial capital per worker remains zero.
b. initial capital per worker increases. d. initial growth rate of capital per worker increases.

62. In the long run, an economy with twice as much labor has
a. less than twice as much capital. c. less than twice as much real GDP.
b. twice as much capital per worker. d. twice as much real GDP.

63. In the long run, an economy with twice as much labor has
a. more than twice as much capital and real GDP. c. less than twice as much capital and real GDP.
b. twice as much capital per worker and output per worker. d. twice as much capital and real GDP.

64. If the population growth rate increases, then in the steady state of the Solow model,
a. real capital per worker is higher. c. the gowth rate of capital per worker is higher.
b. real capital per worker is lower. d. the growth rate of capital per worker is lower.

65. If the population growth rate increases, then in the steady state of the Solow model,
a. real GDP per worker is higher. c. the gowth rate of GDP per worker is higher.
b. real GDP per worker is lower. d. the growth rate of GDP per worker is lower.

SHORT ANSWER

1. What are the short and long run effects of an increase in the saving rate in the Solow growth model?

2. What are the long and short run effects of an increase in technology, A, in the Solow growth model?

3. What are the long run and short run effects to an increase in the labor input in the Solow growth model?

4. What are the long and short run effects of an increase in the population growth rate the Solow growth model?

5. Why does the Solow growth model show the economies of poor countries tend to converge over time toward richer ones in terms of per capita and real GDP per worker?

Chapter 5

TRUE/FALSE

1. In the Solow growth model, the growth rate of capital per worker is positively related to the optimum capital per worker.

2. In the Solow growth model the growth rate of capital per worker is positively related to the initial level of capital per worker.

3. The Solow growth model with technological progress has continuous output per worker growth in the steady state.

4. Ideas are rival goods.

5. Governments grant patents and copyrights to encourage firms to engage in research and development.

6. Conditional convergence is the tendency of economies to coverge when they are similar.

7. In the Solow growth model, the growth rate of output per worker is positively related to the initial level of capital per worker.

8. In the Solow growth model, the growth rate of output per worker is positively related to the optimal level of output per worker.

9. The Solow growth model with exogenous technological growth implies that the steady-state growth rate of real GDP per worker is lower than the rate of technological progress.

10. In the Romer endogenous growth model, the rate of technological progress depends on private returns to R&D investment.

MULTIPLE CHOICE

1. Conditional convergence is the tendency of economies to converge:
a. all the time. c. only when economic conditions are good..
b. when they are similar. d. only when currencies are stable.

2. Absolute convergence is the tendency of economies to converge:
a. all the time. c. only when economic conditions are good.
b. when they are similar. d. only when currencies are stable.

3. In the Solow growth model transition, the growth rate of capital per worker is negatively related to:
a. the initial capital stock per worker, k(0). c. the optimum output per worker, k*
b. k/k. d. all of the above.

4. In the Solow growth model transition, the growth rate of capital per worker is positively related to:
a. the initial capital stock per worker, k(0). c. the optimum output per worker, k*
b. k/k. d. all of the above.

5. In the Solow growth model transition, the growth rate of output per worker is negatively related to:
a. the initial capital stock per worker, k(0). c. the optimum output per worker, y*
b. y/y. d. all of the above.

6. In the Solow growth model transition, the growth rate of output per worker is positively related to:
a. the initial capital stock per worker, k(0). c. the optimum output per worker, y*
b. y/y. d. all of the above.

7. The key equation for conditional convergence for capital per worker is:
a. c.
b. Y = A•F(K,L) d.

8. The key equation for conditional convergence for output per worker is:
a. c.
b. Y = A•F(K,L) d.

9. In the key equation for convergence , y(0) is:
a. the initial level of output. c. the optimum level of output.
b. the initial level of output per worker. d. the optimum level of output per worker.

10. In the key equation for convergence , y* is:
a. the initial level of output. c. the optimum level of output.
b. the initial level of output per worker. d. the optimum level of output per worker.

11. In the key equation for convergence , k* is:
a. the initial level of capital. c. the optimum level of capital.
b. the initial level of capital per worker. d. the optimum level of capital per worker.

12. In the key equation for convergence , k(0) is:
a. the initial level of capital. c. the optimum level of capital.
b. the initial level of capital per worker. d. the optimum level of capital per worker.

13. Convergence can be seen in the data of all countries together if one holds constant:
a. the saving rate. c. the degree the rule of law is maintained.
b. the fertility rate. d. all of the above.

14. Convergence can be seen in the data of all countries together if one holds constant:
a. the degree that democracy is maintained. c. the average rate of inflation.
b. changes in the terms of trade. d. all of the above.

15. Convergence can be seen in the data of all countries together if one holds constant:
a. the size of government. c. investment in education and health.
b. the extent of international openness. d. all of the above.

16. In the Solow growth model, the long run rate of growth of output per worker is:
a. zero c. cyclical.
b. negative. d. positive.

17. A growth model with continuing output per worker growth in the long run is:
a. the production function. c. the Solow growth model.
b. the Ak model of constant average product of capital. d. all of the above.

18. If sA > s + n in the model with constant average product of capital, the long run growth rate is:
a. constant. c. negative.
b. positive d. cyclical.

19. A problem with the constant average product of capital growth model is that:
a. output per worker grows in the long run. c. the Y/K ratio grows.
b. there is no convergence. d. all of the above.

20. A problem with the constant average product of capital growth model is that:
a. a common view among economist is that the average product of capital eventually starts to fall as capital rises. c. the Y/K ratio grows.
b. output per worker grows in the long run. d. all of the above.

21. If sA > s + n in the model with constant average product of capita, the long run growth rate is:
a. c. sA – (s +N)
b. Ak d. none of the above.

22. In the Solow growth model with technological progress,
a. k* is constant. c. k* is cyclical.
b. k* is growing d. k* is declining.

23. In the Solow growth model with technological progress in the steady state:
a. capital per worker is constant. c. capital per worker is increasing.
b. capital per worker is cyclical. d. capital per worker is declining.

24. In the Solow growth model with technological progress in the optimal amount of capital per worker is
a. growing. c. cyclical.
b. shrinking. d. fluctuating.

25. In endogenous growth models, technological progress comes from:
a. outside the system. c. increases in the capital stock.
b. research and development. d. all of the above.

26. An example of a rival capital good is:
a. infrastructure like roads. c. an idea like a new chemical formula for a drug.
b. a machine like a printing press. d. all of the above.

27. An example of a non-rival good is:
a. a output like a pizza. c. an idea like a new chemical formula for a drug.
b. a machine like a printing press. d. all of the above.

28. An example of a non-rival good is:
a. mathematical formulas in calculus. c. an idea like a new chemical formula for a drug.
b. codes for computer software. d. all of the above.

29. An example of a rival capital good is:
a. an employee like an R&D engineer. c. a structure like a factory.
b. a machine like a printing press. d. all of the above.

30. An example of a non-rival good is:
a. an output like a shirt. c. a structure like a factory.
b. code for computer software. d. all of the above.

31. An example of non-rival good is:
a. mathematical formulas in calculus. c. an output like a dress.
b. a machine like a laser printer. d. all of the above.

32. To encourage firms to engage in research and development (R&D), governments grant temporary monopolies in the production of the goods that result from R&D called:
a. patents. c. anti-trust exemptions.
b. land grants. d. all of the above.

33. To encourage firms to engage in research and development (R&D), governments grant temporary monopolies in the production of the word or symbol based goods like books and computer code that result from R&D called:
a. cartels. c. anti-trust exemptions.
b. copyrights. d. all of the above.

34. The private return from research and development might be less than the social return because:
a. others than just the inventor can use inventions that come out of research and development. c. it is funded by the government.
b. it is encouraged by patents and copyrights. d. all of the above.

35. The rewards to private R&D depend on:
a. the costs of R&D. c. the security of intellectual property rights.
b. the rewards from the results of R&D. d. all of the above.

36. The rewards to private R&D are negatively related to:
a. the costs of R&D. c. the security of intellectual property rights.
b. the rewards from the results of R&D. d. all of the above.

37. The rewards to private R&D are positively related to:
a. the costs of R&D. c. the security of intellectual property rights.
b. growth rate of capital per worker. d. all of the above.

38. If intellectual property rights become better secured, then:
a. the costs of R&D are greater. c. the private returns to R&D are greater.
b. the costs of R&D are smaller. d. the private returns to R&D are smaller.

39. The ability to control the inventions from R&D spending is known as
a. greed. c. intellectual property rights.
b. a rival good. d. all of the above.

40. A business may not seek a patent on an idea or invention because:
a. patents are not valuable. c. ideas and inventions are non-rival.
b. approval is costly. d. all of the above.

41. Diffusion of technology means:
a. how many industries a technology can be used in. c. how expensive a technology is.
b. describes the imitation and adaptation of technology from country to country. d. how many scientist had to work on a technology.

42. Steady state growth is when:
a. when the average product of capital, y/k, is unchanging as k increases at a constant rate. c. when the rate growth of output per worker is constant at zero.
b. when the rate of growth of capital per worker is constant at zero. d. all of the above.

43. With steady state growth:
a. ( y/y)* = ( k/k)* c. ( y/y)*= g/(1- )
b. y/k is constant. d. all of the above.

44. With steady state growth:
a. ( y/y)* = ( k/k)*. c. y* = 0.
b. k* = 0. d. all of the above.

45. With steady state growth:
a. there is absolute convergence. c. k* growth fluctuates.
b. y/k is constant. d. all of the above.

46. With steady state growth:
a. k* growth fluctuates. c. ( y/y)*= g/(1- )
b. there is absloute convergence. d. all of the above.

47. With steady state growth:
a. the optimal output per worker and capital per worker grow at the same rate. c. the average product of capital is constant.
b. the steady state growth rate of real GDP per worker is greater than the rate of technological progress. d. all of the above.

48. With steady state growth:
a. the optimal output per worker and capital per worker grow at the same rate. c. the average product of capital falls.
b. the steady state growth rate of real GDP per worker is equal to the rate of technological progress. d. all of the above.

49. With steady state growth:
a. the optimal output per worker grows faster than optimal capital per worker. c. the average product of capital is constant.
b. the steady state growth rate of real GDP per worker is less than the rate of technological progress. d. all of the above.

50. With steady state growth:
a. the optimal output per worker grows faster than the optimal capital per worker. c. the average product of capital is falling.
b. the steady state growth rate of real GDP per worker is greater than the rate of technological progress. d. all of the above.

51. A government which promotes free trade across borders will
a. increase efficiency, which increases productivity and the steady-state real GDP per worker. c. increase poverty, which decreases productivity and the steady-state real GDP per worker.
b. decrease efficiency, which decreases productivity and the steady-state real GDP per worker. d. decrease saving, which decreases the steady-state real GDP per worker.

52. A country which has a poorly-performing judicial system will experience
a. an increase in efficiency, which increases productivity and the steady-state real GDP per worker. c. an increase in saving, which increases the steady-state real GDP per worker.
b. a decrease in efficiency, which decreases productivity and the steady-state real GDP per worker. d. a decrease in saving, which decreases the steady-state real GDP per worker.

53. The evidence on conditional convergence
a. indicates that conditional convergence holds for a broad group of countries. c. indicates that absolute convergence is more likely than conditional convergence.
b. fails to show any notable signs of conditional convergence. d. fails to hold constant variables such as saving rates and fertility rates, so is inconclusive.

54. Recent research on the determinants of economic growth suggest which of the following variables helps to explain growth?
a. the extent of official corruption c. the degree of international openness
b. the scope of education and health programs. d. all of the above.

55. The high growth rates of real GDP per person in South Korea and Taiwan from the 1960s to 2000 reflect
a. high steady-state values for capital per worker. c. high initial values for capital per worker.
b. low steady-state values for population growth. d. high initial values for output per worker.

56. Absolute convergence suggests that growth rates of real GDP per person in sub-Saharan Africa from 1960 to 2000 would be
a. high. c. low.
b. moderate. d. negative.

57. Conditional convergence suggests that growth rates of real GDP per person in sub-Saharan Africa from 1960 to 2000 would be
a. high. c. low.
b. moderate. d. negative.

58. The fact that growth rates of GDP per worker in many African countries were the lowest in the world from 1960 to 2000 can be explained by
a. absolute convergence. c. partial convergence.
b. conditional convergence. d. steady-state convergence.

59. The fact that growth rates of GDP per worker in many African countries were the lowest in the world from 1960 to 2000 can be explained by
a. low initial values of capital per worker. c. low steady-state values of capital per worker.
b. low initial values of GDP per worker. d. high initial values of saving.

60. The fact that growth rates of GDP per worker in many African countries were the lowest in the world from 1960 to 2000 can be partly explained by
a. low initial values of capital per worker. c. low rates of population growth.
b. low initial values of GDP per worker. d. weak education and health programs.

61. The fact that growth rates of GDP per worker in many East Asian countries were high from 1960 to 2000 can be partly explained by
a. high initial values of capital per worker. c. relatively little openness to international trade.
b. high initial values of GDP per worker. d. satisfactory programs in education and health.

62. In the Solow growth model with exogenous technological progress, if the share of capital income is 1/2 and technology improves at a rate of 1 percent per year, then the steady-state growth rate of real GDP per person equals
a. 2 percent per year. c. 0.5 percent per year.
b. 1 percent per year. d. zero percent per year.

63. In the Solow growth model with exogenous technological progress, if the share of capital income is 1/3 and technology improves at a rate of 2 percent per year, then the steady-state growth rate of real GDP per person equals
a. zero percent per year. c. 2 percent per year.
b. 1 percent per year. d. 3 percent per year.

64. In the Solow growth model with exogenous technological progress, absolute convergence
a. continues to exist, but conditional convergence does not. c. and conditional convergence continue to exist.
b. does not exist, but conditional convergence continues to exist. d. and conditional convergence no longer exist.

65. The Romer model of endogenous growth suggests that countries that spend more on R&D tend to have
a. lower rates of applications for patents and copyrights. c. higher growth rates of GDP per person.
b. lower growth rates of of capital per person. d. lower growth rates of GDP per person.

SHORT ANSWER

1. What is conditional convergence?

2. What variables must be held constant to find convergence in the data on all countries.

3. What is the key equation for conditional convergence and what are the direction of influences?

4. What are the steady-state growth results of a constant average product of capital model of growth and what are the problems of such a model?

5. What happens when exogenous technological change is modeled in the Solow growth model?

ECO 302 Week 5 Quiz

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:
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 by the lender. d. assures the person is who they say they 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.
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.
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.

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 to fall. d. until the marginal product of capital is 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.

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

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.

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?

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?

Chapter 7

TRUE/FALSE

1. If the value of initial assets increases, then a household will change consumption or present value of asset at the end of period 2 due to an income effect.

2. $100 a year from now is equal in worth to $100 today.

3. A discount factor is used to deflate nominal consumption to real consumption.

4. If wages rises by $10 per worker just this period, we would expect to see consumption rise by much less than $10 this period.

5. The aggregate household budget constraint is consumption plus net investment is real GDP less depreciation.

6. In the multiyear household budget constraint, wage incomes from each year are added together without further adjustments.

7. In the multiyear household budget constraint, initial asset values are excluded.

8. An increase in the interest rate leads to an income effect and an intertemporal-substitution effect on consumption which offset each other.

9. An increase in the interest rate leads to an income effect which increases consumption and saving in year 1.

10. An increase in the interest rate leads to an intertemporal substitution effect which decreases consumption and increases saving in year 1.

MULTIPLE CHOICE

1. Real profit is zero when:
a. the interest rate is zero. c. the labor and capital markets clear.
b. the depreciation rate is high. d. the labor and capital markets do not clear.

2. When the labor and capital markets clear:
a. depreciation is zero. c. a dollar today is worth more than a dollar in the future.
b. real profit is zero. d. all of the above.

3. Real household saving is:
a. B + K c. ( B/P) + K
b. B + ( K/P) d. ( B/P) + ( K/P)

4. Real income is:
a. wL + i(B+K) c. (w/P)L + i((B/P)+(K/P))
b. (w/P)L + i((B/P)+ K) d. (w/P)L + i(B+ K)

Figure 7.1

5. In Figure 7.1 if the household opts to consume all its income it will be at point:
a. F c. H
b. G d. I

6. In Figure 7.1 if the household decides to save all of its income, it would be at point:
a. F c. H
b. G d. I

7. In Figure 7.1 if the household moves from point G to point H on its budget, it would be:
a. saving and consuming more. c. saving more and consuming less.
b. saving less and consuming more. d. saving and consuming less.

8. In Figure 7.1 if the household moves from point I to point H on its budget, it would be:
a. saving and consuming more. c. saving more and consuming less.
b. saving less and consuming more. d. saving and consuming less.

9. In Figure 7.1 if the household moves from point F to point H on its budget, it would be:
a. saving and consuming more. c. saving more and consuming less.
b. saving less and consuming more. d. saving and consuming less.

10. In Figure 7.1 if the household moves from point H to point G on its budget, it would be:
a. saving and consuming more. c. saving more and consuming less.
b. saving less and consuming more. d. saving and consuming less.

11. In Figure 7.1 if the household moves from point H to point G on its budget, it would be:
a. gaining one unit of saving and one unit of consumption. c. gaining one unit of saving for giving up five units of consumption.
b. giving up one unit of saving for one unit of consumption. d. giving up one unit of saving and five units of consumption.

12. Real saving in year one is:
a. real bonds plus capital in year 1 minus real bonds and capital in year 0. c. bonds plus capital in period 1.
b. bonds plus capital plus money period 1. d. interest times the sum of bonds plus capital in period 1.

13. The household’s year one budget constraint is:
a. real assets at the end of year zero plus real income in year one less consumption in year one equals real assets at the end of year one. c. real assets at the end of year zero plus real income in year one plus consumption in year one equals real assets at the end of year one.
b. real income in year one less real assets at the end of year zero less consumption in year one equals real assets at the end of year one. d. real income in year one plus consumption in year one less real assets at the end of year zero equals real assets at the end of year one.

14. In the one period budget constraint sources of funds include:
a. labor income. c. income from bonds.
b. income from capital. d. all of the above.

15. In the one period budget constraint sources of funds include:
a. labor income. c. capital gains.
b. interests bearing money. d. all of the above.

16. In the one period budget constraint sources of funds include:
a. capital gains. c. income from rising prices.
b. income from capital. d. all of the above.

17. In the one period budget constraint sources of funds include:
a. capital gains. c. income from bonds.
b. inflation. d. all of the above.

18. In the one period budget constraint the uses of funds include:
a. purchases of consumption goods. c. purchases of bonds.
b. purchases of capital goods. d. all of the above.

19. In the one period budget constraint the uses of funds include:
a. purchases of consumption goods. c. payment profits.
b. payment of wages. d. all of the above.

20. In the one period budget constraint the uses of funds include:
a. payment of transfers. c. payment of wages.
b. purchases of capital goods. d. all of the above.

21. In the one period budget constraint the uses of funds include:
a. payment of transfers. c. purchases of bonds.
b. payment of wages. d. all of the above.

22. The measure used to reduce future consumption to today’s values is called:
a. an implicit deflator. c. an escalator.
b. a discount factor. d. a future value.

23. When a discount factor is multiplied times a future period variable it creates a:
a. future value. c. a real variable.
b. a present value. d. a nominal variable.

24. A dollar today is worth more than a dollar a year from now as long as:
a. the interest rate is negative. c. the depreciation rate is negative.
b. the interest rate is positive. d. the depreciation rate is positive.

25. An income effect is the response of households to changes in the present value of:
a. relative prices. c. uses of funds.
b. sources of funds. d. assets at the end of year two.

26. If the interest rate is greater than zero, then the concept of present value is that a dollar today:
a. is worth more than a dollar a year from now. c. will be worthless a year from now.
b. is worth less than a dollar a year from now. d. is worth the same as a year from now.

27. If the present value of assets at the end of year two is constant, an increase in the present value of sources of funds must cause:
a. consumption in periods one and two to rise. c. consumption to rise in period one and fall in period two.
b. consumption in periods one and two to fall. d. consumption to fall in period one and rise in period two.

28. The present value of sources of funds is:
a. the value of intial assets plus the present value of wage income plus the present value of assets at the end of year two. c. the present value of wage income plus the present value of assets at the end of year two.
b. the value of initial assets plus the present value of assets at the end of year two. d. the value of intial assets plus the present value of wage income.

29. An increase in the interest rate:
a. makes consumption in period two relatively more expensive compared to consumption in period one. c. makes consumption in period two relatively cheaper compared consumption in period one.
b. does not change relative cost of consuming in either period. d. discourages savings in each period.

30. If a household consumes one less unit in period 1, they can consume:
a. on more unit in period two. c. one less unit in period two.
b. (1 + i) more units in period two. d. no more in period two.

31. Utility in economics is:
a. a product with a derived demand like electricity. c. satisfaction or happiness.
b. usefulness. d. all of the above.

32. Utility in economics:
a. used to mean happiness. c. is what a person gets from a good.
b. used to mean satisfaction. d. all of the above.

33. An increase in the interest rate can cause an income effect by:
a. making future consumption cheaper. c. making present consumption cheaper.
b. changing real income in year two. d. all of the above.

34. An increase in the interest rate:
a. makes future consumption cheaper. c. makes present consumption more expensive.
b. increases future income. d. all of the above.

35. An increase in the interest rate:
a. makes future consumption cheaper. c. makes present consumption cheaper.
b. decreases future income. d. all of the above.

36. An increase in the interest rate:
a. makes future consumption more expensive. c. makes present consumption more expensive.
b. decreases future income. d. all of the above.

37. An increase in the interest rate:
a. makes future consumption more expensive. c. makes present consumption cheaper.
b. increases future income. d. all of the above.

38. An intertemporal substitution effect is caused by a change in:
a. a price from one period to another. c. income.
b. wealth. d. all of the above.

39. The marginal propensity to save out of a temporary change in income is approximately:
a. 1 c. 0
b. 0.5 d. none of the above.

40. The marginal propensity to save out of a permanent change in income is approximately:
a. 1 c. 0
b. 0.5 d. none of the above.

41. The marginal propensity to consume out of a permanent change in income is approximately:
a. 1 c. 0
b. 0.5 d. none of the above.

42. The marginal propensity to consume out of a temporary change in income is approximately:
a. 1 c. 0
b. 0.5 d. none of the above.

43. If a worker receives a one time bonus we would expect them to:
a. save most of it. c. consume most of it.
b. refuse it. d. consume half and save half of it.

44. If a worker receives a bonus every Christmas, we would expect them to:
a. save most of it. c. consume most of it.
b. reject it. d. consume half of it and save half of it.

45. If a person wins $500 in a scratch-off lottery game, we would expect them to:
a. save most of it. c. consume most of it.
b. refuse it. d. consume half and save half of it.

46. If a worker gets a promotion that doubles their salary, with the increase in salary we would expect them to:
a. save most of it. c. consume most of it.
b. reject it. d. consume half of it and save half of it.

47. If the household budget constraint is aggregated over all household, it shows that:
a. consumption plus net investment equal net national product. c. C + K = Y – K
b. consumption plus net investment equals real GDP less depreciation. d. all of the above.

48. If the household budget constraint is aggregated over all household, it shows that:
a. consumption plus net investment equal net national product. c. C – K = Y + K.
b. consumption less net investment equals real GDP less depreciation. d. all of the above.

49. If the household budget constraint is aggregated over all household, it shows that:
a. consumption less net investment equal net national product. c. C – K = Y + K
b. consumption plus net investment equals real GDP less depreciation. d. all of the above.

50. If the household budget constraint is aggregated over all household, it shows that:
a. profit is zero. c. C + K = Y – K
b. PC+ B+P• K = + wL + i(B + PK), d. all of the above.

51. In the multi-year budget constraint the present value of consumption equals the value of initial assets plus the:
a. present value of savings. c. present value of wage incomes.
b. present value of final assets. d. the present value of time.

52. In the two-year household budget constraint, each unit of initial assets is adjusted by
a. multiplying by (1 + io). c. dividing by (1 + io).
b. multiplying by (1 + i1). d. dividing by (1 + i1).

53. In the two-year household budget constraint, each unit of labor in year 2 is adjusted by
a. multiplying by (1 + io). c. dividing by (1 + io).
b. dividing by (1 + i1). d. multiplying by (1 + i1).

54. In the two-year household budget constraint, each unit of conumption in year 2 is adjusted by
a. multiplying by (1 + io). c. dividing by (1 + i1).
b. multiplying by (1 + i1). d. dividing by (1 + i0).

55. For a household budget over two years, suppose the dollar wage rate in year 1 and year 2 equals $12, the price level in year 1 and year 2 equals 2, and the nominal interest rate in year 1 and year 2 equals 3 percent. The total present value of wage income over two years is
a. 24 c. 12
b. 12.18 d. 5.83

56. For a household budget over two years, suppose the dollar wage rate in year 1 and year 2 equals $8, the price level in year 1 and year 2 equals 2, and the nominal interest rate in year 1 and year 2 equals 3 percent. The present value of wage income in year two only is
a. 3.88 c. 4.12
b. 4 d. 5.83

57. Suppose that the present value of a household’s wage income rises. The effect on consumption most likely is
a. zero. c. more consumption in year 2 only.
b. more consumption in both year 1 and 2. d. more consumption in year 1 only.

58. An increase in the interest rate in year 1 leads to
a. an intertemporal substition effect which lowers C1 and lowers C2. c. an intertemporal substition effect which lowers C1 and raises C2.
b. an interpersonal effect which lowers C1 and lowers C2. d. an interpersonal effect which lowers C1 and lowers C2.

59. An increase in the interest rate in year 1 leads to
a. an intertemporal substition effect which raises consumption and saving in year 1. c. an intertemporal substition effect which lowers consumption and raises saving in year 1.
b. an income effect which lowers consumption and saving in year 1. d. an income effect which raises consumption and lowers saving in year 1.

60. For a 2-year household budget constraint, an increase in the interest rate in year 1 leads to which combined effect on consumption?
a. An increase in consumption in year 1. c. A decrease in consumption in year 1.
b. A decrease in consumption in year 1 and an increase in year 2. d. An ambiguous effect.

SHORT ANSWER

1. Derive the household’s two period real budget constraint.

2. What is an intertemporal substitution effect and what can cause one?

3. What is an income effect and what can cause one?

4. What are the effects of an increase in the interest rate on the choice of consumption over time?

5. Show the relationship between the household budget constraint and net national product.

6. Does an increase in permanent income affect household consumption differently than an increase in temporary income?

7. What is the marginal propensity to consume? When would you predict its value to be close to zero?

ECO 302 Week 6 Quiz

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.

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 services decrease. d. the MPK decreases and the demand for 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.
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 business cycle. d. determined outside the model.

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.

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:
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.

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?

Chapter 9

TRUE/FALSE

1. When the capital utilization rate, , is added to the model the interest rate becomes countercyclical.

2.
The higher the capital utilization rate, , the greater the depreciation rate of capital, .

3. An increase in unemployment insurance payments decreases effective real income while unemployed.

4. The duration of unemployment is the number unemployed divided by the labor force.

5. Unemployment will exist in an market clearing model, if it takes some search time for workers to find jobs.

6. An increase in the technology level leads to an outward shift of the demand curve for capital services.

7. An increase in the technology level leads to an increase in the market-clearing real rental price of capital.

8. When a variable capital utilization rate is added to the Barro model, the model predicts that the capital utilization rate will be countercyclical.

9. GDP can rise when a decrease in technology leads to an increase in the capital utilization rate.

10. The natural rate of unemployment in an economy occurs when the job separation rate equals zero.

MULTIPLE CHOICE

1. The capital utilization rate is:
a. the rate capital wears out in a particular period. c. the percentage of capital used in production.
b. the depreciation rate. d. all of the above.

2. When the capital utilization rate, , increases then:
a. GDP increases. c. (hours per period)•(number of machines) increases.
b. machines are in use more hours per period. d. all of the above.

3. When the capital utilization rate, , increases then:
a. GDP decreases. c. (hours per period)•(number of machines) increases.
b. machines are in use fewer hours per period. d. all of the above.

4. When the capital utilization rate, , increases then:
a. GDP decreases. c. (hours per period)•(number of machines) decreases.
b. machines are in use more hours per period. d. all of the above.

5. When the capital utilization rate, , increases then:
a. GDP increases. c. (hour per period)•(number of machines) decreases.
b. machines are in use fewer hours per period. d. all of the above.

6. When we allow a capital utilization rate, , less than 100%, then the rate of return form owning capital becomes:
a. (R/P) – . c. (R/P)• – .
b. (R/P)• – ( ). d. (R/P) – ( ).

7. An owner of capital might set their capital utilization rate below 100% because:
a. the depreciation rate goes up with the capital utilization rate. c. to make time available for maintaining their capital.
b. machines wear out faster when used more intensively. d. all of the above.

8. The optimal capital utilization rate, , is that where:
a. (R/P)• – ( ) is maximized. c. (R/P)• > ( )
b. (R/P)• = ( ) d. (R/P)• < ( )

9. the net real income from supplying capital services is:
a. (R/P)• K – ( )K. c. ( )K – (R/P)•
b. (R/P)• K + ( ). d. (R/P)• K • ( )K

10. Higher capital utilization rates may raise the user costs of capital because higher utilization rates may imply:
a. operating at inconvenient times. c. operating when complementary services like transporters are unavailable or more expensive.
b. paying overtime to employees operating the machines. d. all of the above.

11. Higher capital utilization rates may raise user costs of capital because higher utilization rates may imply:
a. operating at inconvenient times. c. less highway congestion.
b. off-peak utility prices. d. all of the above.

12. Higher capital utilization rates may raise user costs of capital because higher utilization rates may imply:
a. less highway congestion. c. operating when complementary services like transportation are unavailable or more expensive.
b. off peak utility prices. d. all of the above.

13. Higher capital utilization rates may raise user costs of capital because higher utilization rates may imply:
a. less highway congestion. c. off peak utility prices.
b. paying overtime to employees operating the machines. d. all of the above.

14. GDP rises can rise in an expansion due to:
a. an increase in technology, A, directly increasing GDP. c. an increase in technology, A, causing an increase in the capital utilization rate, the quantity of capital services and GDP.
b. an increase in technology, A, causing an increase in labor, L and GDP. d. all of the above.

15. The model predicts the capital utilization rate, , is:
a. acyclical. c. countercyclical.
b. procyclical. d. exogenous.

16. The model predicts that with a negative shock to technology, the capital utilization rate, , will:
a. rise as GDP rises. c. rise as GDP falls.
b. fall as GDP falls. d. fall as GDP rises.

17. After the capital utilization rate, , is included in the model, the interest rate:
a. is still procyclical. c. becomes procyclical.
b. is still countercyclical. d. becomes countercyclical.

18. The US data from 1948 to 2006 shows the capital utilization rate, , is:
a. procyclical as the model predicts. c. procyclical the opposite the model predicts.
b. countercyclical as the model predicts. d. countercyclical the opposite as the model predicts.

19. The model predicts that with a positive shock to technology the capital utilization rate, , will
a. fall as GDP falls. c. rise as GDP rises.
b. fall as GDP rises. d. rise as GDP falls.

20. If the rental price of capital increases, then the capital utilization rate, ,:
a. also increases. c. remains the same.
b. decreases. d. depends on whether the substitution rate is greater than the income effect.

21. The unemployment rate is:
a. the number of workers in the labor force unemployed divided by the number of workers employed. c. the number of workers in the labor force unemployed divided by the labor force.
b. the number of workers employed divide by the number of workers in the labor force unemployed. d. the labor force divided by the number of workers in the labor force unemployed.

22. The vacancy rate in the labor market is:
a. the number of job openings divided by the number of unemployed people in the labor force. c. the ratio of open jobs to filled jobs.
b. the number of job openings divided by the number of workers in the labor force. d. the ratio of open jobs to the total number of jobs that employers want occupied.

23. If the labor force is 100 million, there are 95 million people employed, there are 98 million jobs that employers want occupied, then the number of unemployed workers in the labor force is:
a. 5 million. c. 2 million.
b. 3 million. d. none of the above.

24. If the labor force is 100 million, there are 95 million people employed, there are 98 million jobs that employers want occupied, then the number of vacancies is:
a. 5 million. c. 2 million.
b. 3 million. d. none of the above.

25. If the labor force is 100 million, there are 95 million people employed, there are 98 million jobs that employers want occupied, then the unemployment rate is:
a. 3%. c. 5.3%.
b. 5%. d. none of the above.

26. If the labor force is 100 million, there are 95 million people employed, there are 98 million jobs that employers want occupied, vacancy rate is:
a. 5%. c. 3.1%.
b. 3.2%. d. 3%.

27. If the labor force is 100 million, there are 94 million people employed, there are 99 million jobs that employers want occupied, then the vacancy rate is:
a. 5%. c. 5.3%
b. 5.1% d. 1%

28. One minus the unemployment rate, 1 – u, is:
a. the vacancy rate. c. the employment rate.
b. the labor force. d. the level of employment.

29. Unemployment can exist in a market clearing model, if:
a. there are frictions in the labor market. c. we allow for differences among workers and jobs.
b. it takes some search time for workers to find jobs. d. all of the above.

30. Unemployment can exist in a market clearing model, if:
a. the labor market is in disequilibrium. c. we allow for differences among workers and jobs.
b. we allow capital utilization of less than 100%. d. all of the above.

31. Unemployment can exist in a market clearing model, if:
a. there are frictions in the labor market. c. the labor market is in equilibrium.
b. the labor supply curve is upward sloping. d. all of the above.

32. Unemployment can exist in a market clearing model, if:
a. all workers are identical. c. the labor supply curve is upward sloping.
b. it takes some search time for workers to find jobs. d. all of the above.

33. A worker will accept a job offer, if the real wage offer is above:
a. the worker’s effective real income when unemployed, . c. the worker’s reservation wage.
b. the wage the worker earned in their last job. d. the average wage in the economy.

34. An increase in a worker’s effective real income while unemployed, , will cause the worker’s:
a. real wage offers to increase. c. real reservation wage to increase.
b. real wage offers to decrease. d. real reservation wage to decrease.

35. We expect that an increase in the effective real income while unemployed ,
a. will reduce the job-finding rate. c. increase real wage offers.
b. will increase the job-finding rate. d. decrease real wage offers.

36. A decrease in workers’ effective real incomes while unemployed, , will:
a. lower the job finding rate and raise the expected duration of unemployment. c. raise the job finding rate and lower the expected duration of unemployment.
b. lower the job finding rate and the expected duration of unemployment. d. raise the job finding rate and the expected duration of unemployment.

37. A negative shock to productivity, A, will:
a. lower the job finding rate and raise the expected duration of unemployment. c. raise the job finding rate and lower the expected duration of unemployment.
b. lower the job finding rate and the expected duration of unemployment. d. raise the job finding rate and the expected duration of unemployment.

38. Job separations can be due to:
a. an adverse shock to the firm’s production function. c. a change in a worker’s circumstances such as changing locations.
b. the job being temporary from the start like a seasonal job. d. all of the above.

39. Job separations can be due to:
a. a positive shock to the firm’s production function. c. a change in a worker’s circumstances such as changing locations.
b. an increase in technology. d. all of the above.

40. Job separations can be caused by:
a. an adverse shock to the firm’s production function. c. increased technology, A.
b. foreign competition. d. all of the above.

41. In the Barro model, the natural rate of unemployment is the unemployment rate:
a. where job findings equal job separations. c. the job separation rate equals the job finding rate.
b. job findings are maximized. d. job separations are minimized.

42. If the job separation rate is 0.02 and the job finding rate is 0.3, then the natural rate of unemployment is:
a. 6.25% c. 6.67%
b. 15% d. none of the above.

43. If the job separation rate is 0.03 and the job finding rate is 0.7, then the natural rate of unemployment is:
a. 4.2% c. 23.3%
b. 4.1% d. none of the above.

44. In the Barro model, the natural rate of unemployment is:
a. positively related to that job separations rate. c. fixed.
b. zero. d. positively related to the job finding rate.

45. In the Barro model, the natural rate of unemployment is:
a. negatively related to that job separations rate. c. fixed.
b. zero. d. negatively related to the job finding rate.

46. In US data vacancies from 1954 to 2006 as measure by the help-wanted index are:
a. procyclical as the model predicts. c. procyclical the opposite the model predicts.
b. countercyclical as the model predicts. d. countercyclical the opposite the model predicts.

47. Discouraged workers are:
a. those that are unemployed. c. those who have dropped out of the labor force.
b. those that are underemployed. d. those who are under paid.

48. The job-finding rate is:
a. the number of hires per month divided by the number unemployed. c. the number of hires per month divided by the unemployment rate.
b. the number of hires per month divided by the number employed. d. the number of hires per month divided by the employment rate.

49. The US data from December 2000 to February 2006 shows that the job finding rate is:
a. acyclical. c. procyclical.
b. countercyclical. d. exogenous.

50. The US data from December 2000 to February 2006 shows that the job separation rate is:
a. acyclical. c. procyclical.
b. countercyclical. d. exogenous.

51. Owners of capital choose the utilization rate to
a. maximize their net real income from supplying capital services. c. minimize their net real income from supplying capital services.
b. maximize their net real costs from supplying capital services. d. minimize their net real rental payments from supplying capital services.

52. When the Barro model allows for variable capital utilization rates, the result is that an increase in the technology level causes
a. a decrease in the capital utilization rate. c. a decrease in the quantity of capital services.
b. an increase in the capital utilization rate. d. no change in the quantity of capital services.

53. When the technology level increases,
a. the demand for capital services shifts to the left. c. the demand for capital services shifts to the right.
b. the supply of capital services shifts to the right. d. both (b) and (c).

54. When the technology level increases, the market for capital services
a. fails to clear. c. clears at the original real rental price.
b. clears at a lower real rental price. d. clears at a higher real rental price.

55. When the technology level increases, the market for capital services
a. clears at a higher quantity of capital services. c. clears at the original quantity of capital services.
b. clears at a lower quantity of capital services. d. fails to clear.

56. On a graph of the capital services market, the supply of capital services
a. slopes down because an increase in the real rental price raises the capital utilization rate. c. slopes up because an increase in the real rental price lowers the capital utilization rate.
b. slopes up because an increase in the real rental price raises the capital utilization rate. d. slopes down because an increase in the real rental price lowers the capital utilization rate.

57. On a graph of the capital services market, the demand for capital services shifts out when
a. the technology level decreases, which increases the marginal product of capital for any give amount of capital input. c. the technology level increases, which increases the marginal product of capital for any give amount of capital input.
b. the technology level decreases, which decreases the marginal product of capital for any give amount of capital input. d. the technology level increases, which decreases the marginal product of capital for any give amount of capital input.

58. U.S. data show that the labor force is
a. strongly countercyclical. c. strongly procyclical.
b. acyclical. d. weakly procyclical.

59. U.S. data show that the employment rate is
a. strongly procyclical. c. strongly countercyclical.
b. acyclical. d. weakly countercyclical.

60. An increase in unemployment insurance payments from the government will
a. increase a person’s effective real income while unemployed. c. have no effect on a person’s effective real income while unemployed.
b. decrease a person’s effective real income while unemployed. d. either (a) or (c).

61. An increase in unemployment insurance payments from the government will
a. decrease a person’s duration of unemployment. c. have no effect on a person’s duration of unemployment.
b. increase a person’s duration of unemployment. d. either (a) or (c).

62. An increase in unemployment insurance payments from the government will
a. increase the job finding rate. c. decrease the job-finding rate.
b. have no effect on the job-finding rate. d. either (a) or (b).

63. The job-separation rate is likely to be high among workers who are
a. inexperienced and difficult to evaluate. c. in industries where there are frequent shocks to product demand.
b. likely to experience changes in job preferences. d. all of the above.

64. At the natural rate of unemployment,
a. the job-separation rate is positive. c. the job-finding rate equals zero.
b. the job-separation rate equals zero. d. both (b) and (c).

65. At the natural rate of unemployment,
a. the job-separation and job-finding rates are each zero. c. tthe job-separation and job-finding rates are both negative.
b. the job-separation and job-finding rates are both positive. d. the job-separation rate is zero and the job-finding rate is positive.

SHORT ANSWER

1. How does the capital utilization enter the production function?

2. How does the capital utilization rate affect the depreciation rate and why?

3. How can there be unemployment in a market clearing model?

4. How does the Barro model define the natural rate of unemployment and what does the natural rate of unemployment depend on.

5. What is the reservation wage?

6. How does an increase in technology affect the market-clearing real rental price of capital services?

ECO 302 Week 7 Quiz

Chapter 10

TRUE/FALSE

1. High powered money is commodity money like gold and silver.

2. If households reduce money balances, then their transactions costs go up.

3. If the money supply grows faster than money demand, then the price level rises.

4. If the interest rate increases, then the real demand for money also increases.

5. The neutrality of money means that one time changes in the money supply do not affect real variables.

6. M1 includes a broader array of deposit accounts than M2 does.

7. In the Barro model, money and barter can both be used for exchanges.

8. In the Barro model, households hold money as a long-term store of value.

9. If the price level doubles, then a household’s nominal demand for money also doubles.

10. If the nominal quantity of money supplied does not vary, then the price level will be countercyclical.

MULTIPLE CHOICE

1. Fiat money is money that has value because of:
a. its intrinsic value. c. government decree.
b. it is a commodity. d. all of the above.

2. Commodity money is money that has value because:
a. of the intrinsic value of the commodity. c. the government says so.
b. it is legal tender. d. all of the above.

3. If a person holds one dollar and does not lose it, then as long as the person holds that dollar they will have:
a. the commodity value of the dollar. c. an interest bearing asset.
b. one dollar in currency. d. all of the above.

4. High powered money is:
a. money held by business for investment. c. total currency in circulation.
b. total currency in circulation plus depository institutions deposits at the Federal Reserve. d. government bonds held by the public and depository institutions.

5. A monetary aggregate is:
a. high powered money. c. money defined more broadly than currency.
b. commodity money. d. total currency in circulation plus depository institutions deposits at the Federal Reserve.

6. US M1 money includes:
a. currency held by the public. c. traveler’s checks.
b. checkable deposits. d. all of the above.

7. US M1 money includes:
a. savings deposits. c. time deposits.
b. checkable deposits. d. all of the above.

8. US M1 money includes:
a. currency, traveler’s checks and checkable deposits. c. currency, checkable deposits, savings deposits.
b. checkable deposits, traveler’s checks and savings deposits. d. currency, time deposits, checkable deposits.

9. US M2 money includes:
a. currency. c. small time deposits.
b. demand deposits d. all of the above.

10. US M2 money includes:
a. currency, time deposits government bonds. c. checkable deposits, savings deposits, small time deposits.
b. savings deposits, small time deposits, private bonds. d. retail money market mutual funds, small time deposits, government bonds.

11. Money is different from other assets like capital and bonds in that:
a. money does not pay interest. c. capital and bonds are better long term stores of value.
b. money can be spent for purchases. d. all of the above.

12. Money is different from other assets like capital and bonds in that:
a. money does not pay interest. c. money is a better long term store of value.
b. money has intrinsic value. d. all of the above.

13. Money is different from other assets like capital and bonds in that:
a. money pays a higher interest rate. c. money is a better long term store of value.
b. money can be spent for purchases. d. all of the above.

14. Money is different from other assets like capital and bonds in that:
a. money has intrinsic value. c. capital and bonds are better long term stores of value.
b. money pays a higher rate of interest. d. all of the above.

15. When households reduce their average money balances, they
a. purchase more goods. c. incur more opportunity costs.
b. they earn less interest. d. incur more transaction costs.

16. If a person’s income doubles we expect their cash holding to:
a. double. c. less than double.
b. more than double. d. decline.

17. Economies of scale in cash management means:
a. at a higher income household’s hold more money as a proportion of their income. c. the proportion of income held is not affected by household income.
b. at lower incomes household’s hold more money as a proportion of their income d. at lower income households hold less money as a proportion of their income.

18. Real money demand does not change when:
a. nominal GDP changes. c. the price level changes.
b. the interest rate changes. d. all of the above.

19. Among the source of transactions costs associated with reducing average money balances are:
a. brokerage fees. c. the time spent going to the ATM.
b. the time spent going to the bank. d. all of the above.

20. Among the sources of transactions costs associated with reducing average money balances are:
a. brokerage fees. c. foregone interest payments.
b. opportunity costs. d. all of the above.

21. Among the source of transactions costs associated with reducing average money balances are:
a. foregone interest payments. c. opportunity costs.
b. the time spent going to the bank or ATM. d. all of the above.

22. The demand for money is:
a. negatively related to the price level. c. positively related to real GDP.

b. positively related to the interest rate. d. all of the above.

23. The demand for money is:
a. negatively related to the price level. c. negatively related to real GDP.

b. negatively related to the interest rate. d. all of the above.

24. The demand for money is:
a. positively related to the price level. c. negatively related to real GDP.

b. positively related to the interest rate. d. all of the above.

25. The demand for money is:
a. positively related to the price level. c. positively related to real GDP.

b. negatively related to the interest rate. d. all of the above.

26. When the supply of money increases, then
a. the price level rises. c. money demand increases.
b. the price level falls. d. money demand decreases.

27. When the demand of money increases, then
a. the price level rises. c. the money supply increases.
b. the price level falls. d. the money supply decreases.

Figure 10.1

28. In Figure 10.1, if money demand decreases then:
a. the equilibrium price level rises. c. the money supply rises.
b. the equilibrium prices level falls. d. the money supply falls.

29. In Figure 10.1, if the money supply decreases then:
a. the equilibrium price level rises. c. money demand increases.
b. the equilibrium price level falls. d. money demand decreases.

30. In Figure 10.1 if the interest rate, i, were to increase, then
a. money demand decreases and the price level increases. c. the money supply and the price level would increase.
b. money demand increases and the price level decreases. d. the money supply and the price level would decrease.

31. In Figure 10.1 if real GDP, Y, were to increase, then
a. money demand decreases and the price level increases. c. the money supply and the price level would increase.
b. money demand increases and the price level decreases. d. the money supply and the price level would decrease.

32. In Figure 10.1 the interaction of the money supply and money demand determines:
a. real GDP. c. growth rate of the economy.
b. the price level. d. all of the above.

33. In Figure 10.1 if money demand increases faster than the money supply then:
a. the price level will rise over time. c. GDP will rise over time.
b. the price level will fall over time. d. GDP will fall over time.

34. In Figure 10.1 if the money supply increases faster than money demand then:
a. the price level will rise over time. c. GDP will rise over time.
b. the price level will fall over time. d. GDP will fall over time.

35. In Figure 10.1, if money demand increases then:
a. the equilibrium price level rises. c. the money supply rises.
b. the equilibrium price level falls. d. the money supply falls.

36. In Figure 10.1, if the money supply increases then:
a. the equilibrium price level rises. c. the money supply rises.
b. the equilibrium price level falls. d. the money supply falls.

37. Real money demand is:
a. Md/P. c. the purchasing power of money balances.
b. a function of real GDP and the interest rate. d. all of the above.

38. Real money demand is:
a. money demand after taxes. c. determined by the central bank.
b. a function of real GDP and the interest rate. d. all of the above.

39. Real money demand is:
a. determined by the central bank. c. the purchasing power of money balances.
b. money demand after taxes. d. all of the above.

40. If the money supply doubles, then
a. real GDP doubles. c. the interest rate, i, doubles.
b. real money demand doubles. d. none of the above.

41. If the money supply doubles, then
a. GDP doubles. c. the interest rate, i, doubles.
b. the price level doubles. d. none of the above.

42. Under price level targeting the money supply becomes:
a. neutral. c. exogenous.
b. endogenous. d. predetermined.

43. During a recession,
a. the interest rate and real GDP fall tending to cause money demand to fall. c. the interest rate falls tending to cause money demand to rise, but is at least partly offset by real GDP falling tending to cause money demand to fall.
b. the interest rate and real GDP rise tending to cause money demand to rise. d. the interest rate rising and real GDP falling tend to cause money demand to rise.

44. If policy makers target a specific price level, then:
a. the money supply becomes exogenous in the model. c. the money supply becomes endogenous in the model.
b. the money supply becomes predetermined in the model. d. the money supply becomes neutral in the model.

45. In US data from 1954 to 2006, the price level is:
a. procyclical as we would expect if the monetary authority does not vary the money with the business cycle. c. countercyclical as we would expect if the monetary authority does not vary the money supply with the business cycle.
b. procyclical as we would expect if the monetary authority varies the money supply with the business cycle. d. countercyclical as we would expect if the monetary authority varies the money supply with the business cycle.

46. Real money demand is:
a. L(Y, i). c. P • L(Y, i).
b. equal to the money supply. d. all of the above.

47. Money demand and the money supply are brought into equilibrium by:
a. real GDP adjusting. c. the interest rate adjusting.
b. the price level adjusting. d. the real wage rate adjusting.

48. Price level targeting implies that the monetary authority:
a. changes the money supply to match movements in money demand. c. changes money demand and money supply to match movements in the price level.
b. changes money demand to match movements in the money supply. d. changes money demand to match movements in the price level.

49. The neutrality of money implies:
a. one time changes in real variables do not affect money demand. c. one time changes in nominal variables do not affect money demand.
b. one time changes in the money supply do not affect real variables. d. one time changes in the money supply do not affect nominal variables.

50. If for one period the money supply increases, then:
a. real GDP increases. c. real capital per worker increases.
b. the real wage increases. d. none of the above.

51. If James performs one hour of house cleaning for Lilly in exchange for Lilly performing one hour of yardwork for James, then the exchange involved
a. barter. c. items with no intrinsic value.
b. fiat money. d. the capital services market.

52. Fiat money would most likely hold the dominant position as a medium of exchange when
a. legal restrictions prevent private firms from issuing small, interest-bearing bonds as substitutes for money. c. the government requires that taxes be paid using the fiat money.
b. the government declares the money to be legal tender. d. all of the above.

53. The monetary base does not include
a. total currency in circulation. c. bank deposits at the Federal Reserve.
b. checkable deposits. d. all of the above.

54. Checkable deposits are
a. deposits at financial institutions that can be withdrawn only after paying a penalty. c. deposits at financial institutions that can be withdrawn by writing a check.
b. savings deposits at financial institutions that can be withdrawn by transfer to another account. d. deposits on which the bank checks the deposit slip carefully.

55. If Alicia transfers $100 from her savings deposit account to her checkable deposit account, then M1
a. increases and M2 stays the same. c. increases and M2 decreases.
b. increases and M2 increases. d. decreases and M2 increases.

56. If Hagen transfers $100 from his checkable deposit account to his savings deposit account, then M1
a. increases and M2 stays the same. c. decreases and M2 stays the same.
b. increases and M2 increases. d. decreases and M2 increases.

57. U.S. data show that checkable deposits have
a. increased in importance as a payment method. c. increased in importance as a portion of M1.
b. decreased in importance as a payment method. d. decreased in importance as a portion of the monetary base.

58. Which asset below is the least useful long-term store of value?
a. bonds. c. either (a) or (b).
b. ownership of capital. d. money.

59. A household’s demand for money arises from the household’s
a. optimal strategy for money management. c. need to provide capital services to the market.
b. need to provide labor services to the market. d. desire to increase its transactions costs.

60. The empirical evidence on the demand for money finds that
a. an decrease in the price level lowers the real demand for money in the same proportion. c. an increase in the price level lowers the nominal demand for money in the same proportion.
b. interest rates are negatively related to money. d. real GDP is negatively related to money.

61. The point where money supplied equals money demanded determines
a. the real interest rate. c. the price level.
b. the nominal interest rate. d. the real return on capital services.

62. Which of the following scenarios would mostly likely cause the price level to double?
a. The nominal quantity of money demanded doubles. c. The nominal wage doubles.
b. The nominal quantity of money demanded falls by half. d. The nominal quantity of money supplied doubles.

63. In general equilibrium, a one-time increase in the nominal quantity of money supplied
a. does not affect the interest rate. c. decreases the interest rate.
b. increases the interest rate. d. either (a) or (b).

64. The general equilibrium in the Barro model assumes that prices are
a. inflexible and adjust slowly. c. unaffected by changes in the money supply.
b. flexible and adjust rapidly. d. unimportant in explaining money demand.

65. Most economists agree that money is
a. not neutral in the long-run. c. neutral in the long-run.
b. not neutral in the short- or long-run. d. neutral in the short-run.

SHORT ANSWER

1. What is the money demand function and what is the direction of influence of the variables on money demand?

2. Why does economizing on money balances lead to greater transactions cost?

3. How do money demand and the money supply interact to determine the price level?

4. What does money neutrality mean?

5. What would happen to money demand, the money supply and the price level if there were a positive shock to production?

6. According to the Barro model, will the price level be high or low in a recession?

Chapter 11

TRUE/FALSE

1. The real rate of interest is the nominal rate of interest less the expected inflation rate.

2. The real return on money is zero.

3. An increase in the money growth rate affects household consumption, C.

4. In the market clearing model, an increase in the money growth rate leads to an increase in the inflation rate.

5. In the market clearing model an increase in the money growth rate leads to a decrease in the nominal interest rate.

6. Inflation is a measure of the growth of prices in the volatile food and energy categories.

7. Households with rational expectations have no errors in their predictions.

8. Expected and actual inflation are equal in a model with rational expectations.

9. Deflation occurs when the inflation rate slows down, but remains positive.

10. Data show a strong negative relationship between the inflatin rate and the growth rate of nominal currency.

MULTIPLE CHOICE

1. The actual inflation rate is:
a. the change in the price level divided by the original price level. c. the original price level divided by the new price level.
b. The original price level divided the change in price level. d. the new price level divided by the original price level.

2. If the price level last year was 110 and this year is 118, then the inflation rate between last period and this period was:
a. 7.3%. c. 8%
b. 7%. d. 6.8%.

3. If the price level last year was 135 and this year is 142, then the inflation rate between last period and this period was:
a. 4.9%. c. 5.1%
b. 7%. d. 5.2%.

4. If the price level last year was 106 and this year is 102, then the inflation rate between last period and this period was:
a. -3.8% c. 3.8%
b. 4%. d. -3.9%.

5. The unexpected inflation rate is:
a. the expected inflation rate less the actual inflation rate. c. the actual inflation rate less the expected inflation rate.
b. the expected inflation rate divided by the actual inflation rate. d. the actual inflation rate divided by the expected inflation rate.

6. If the expected inflation rate is 5% and the actual inflation rate is 4%, then the unexpected inflation rate is:
a. 1%. c. -1%.
b. 9%. d. 1.25%.

7. If the expected inflation rate is 3% and the actual inflation rate is 5%, then the unexpected inflation rate is:
a. 2%. c. -2%.
b. 8%. d. 1.67%.

8. If the expected inflation rate is 5% and the unexpected inflation rate is 4%, then the actual inflation rate is:
a. 1%. c. -1%.
b. 9%. d. 1.25%.

9. If the expected inflation rate is 3% and the unexpected inflation rate is -2%, then the actual inflation rate is:
a. 2%. c. -2%.
b. 1%. d. 1.67%.

10. The real interest rate is
a. the nominal interest rate plus the expected inflation rate. c. the nominal interest rate less the expected inflation.
b. the nominal interest rate divided by the expected inflation rate. d. the expected inflation rate divided by the nominal rate of interest.

11. If the nominal interest rate is 5% and the expected inflation rate is 2%, then the expected real rate of interest is:
a. 7%. c. 2.5%.
b. 3% d. -3%.

12. If the nominal interest rate is 2% and the actual inflation rate is 5%, then the actual real rate of interest is:
a. 7%. c. 2.5%.
b. 3% d. -3%.

13. When the real interest rate, r, can differ from the nominal interest rate, i, then:
a. money demand depends on the real rate of interest. c. consumption depends on the nominal rate of interest.
b. consumption depends on the real rate of interest. d. money demand no longer depends on any interest rate.

14. An indexed bond is one:
a. that pays a real rate of interest. c. that is indexed to the expected inflation rate.
b. that is indexed to the economic growth rate. d. that pays a nominal rate of interest.

15. The data on countries around the world show that:
a. the inflation rate is positively related to the growth of currency. c. the inflation rate is inversely related to the growth of currency.
b. the inflation rate is unrelated to the growth in currency. d. countries with high currency growth rates have higher real GDP.

16. The nominal rate of interest on money is:
a. zero. c. minus the inflation rate.
b. real rate of return on money less the inflation rate. d. all of the above.

17. The nominal rate of interest on money is:
a. positive. c. minus the inflation rate.
b. real rate of return on money plus the inflation rate. d. all of the above.

18. The real rate of interest on money is:
a. zero. c. minus the inflation rate.
b. the nominal rate of return on money plus the inflation rate. d. all of the above.

19. If the interest rate is 5% and the inflation rate is 3%, then the nominal rate of return on money is:
a. 2%. c. 5%
b. 3% d. zero.

20. If the interest rate is 5% and the inflation rate is 3%, then the real rate of return on money is:
a. 2%. c. -3%
b. 3% d. zero.

21. If the interest rate is 6% and the inflation rate is 2%, then the nominal rate of return on money is:
a. 2%. c. 8%
b. 4% d. zero.

22. If the interest rate is 6% and the inflation rate is 2%, then the real rate of return on money is:
a. 2%. c. -2%
b. 4% d. zero.

23. In the market clearing model money growth is modeled as:
a. random. c. via the purchase of bonds.
b. lump-sum transfers. d. all of the above.

24. Lump sum transfers for money growth implies:
a. we need to analyze how transfer affects GDP. c. we need to analyze how transfers affect capital.
b. we do not have to analyze how households adjust their behavior to attract transfers. d. we need to model how households adjust their behavior to attract transfers.

25. The expected rate of inflation is:
a. the real rate of interest less the nominal rate of interest. c. the nominal rate of interest plus the real rate of interest.
b. the nominal interest rate on nominal bonds less the interest rate on indexed bonds. d. the interest rate on indexed bonds less the nominal interest rate on nominal bonds.

26. An increase in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. an increase in the price level.
b. a decrease in money demand. d. all of the above.

27. An increase in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. a decrease in the price level.
b. an increase in money demand. d. all of the above.

28. An increase in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. an increase in consumption.
b. a decrease in money demand. d. all of the above.

29. An increase in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. an increase in the price level.
b. an increase in consumption. d. all of the above.

30. An increase in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. an increase in the inflation rate.
b. a decrease in money demand. d. all of the above.

31. An increase in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. an increase in the inflation rate.
b. an increase in money demand. d. all of the above.

32. The growth rate of real money balances is:
a. the growth rate of nominal money less the inflation rate. c. the growth rate of nominal money plus the inflation rate.
b. the growth rate of nominal money divided by the inflation rate. d. the inflation rate divided by the growth rate of nominal money.

33. When the rate of growth rate of money is constant:
a. the inflation rate equals the growth rate of money. c. real money balance are fixed over time.
b. the nominal interest rate is the real rate of interest plus the growth rate of money. d. all of the above.

34. When the rate of growth rate of money is constant:
a. the inflation rate equals the growth rate of money. c. real money balance are declining.
b. the nominal interest rate rises. d. all of the above.

35. When the rate of growth rate of money is constant:
a. the inflation rate is growing. c. real money balance are declining.
b. the nominal interest rate is the real rate of interest plus the growth rate of money. d. all of the above.

36. When the rate of growth rate of money is constant:
a. the inflation rate is growing. c. real money balance are constant over time.
b. the nominal interest rate is declining. d. all of the above.

37. Real revenue from printing money is approximately:
a. the nominal interest rate times real money balances. c. the real interest rate times nominal money balances.
b. the money growth rate times real money balances. d. the money growth rate times nominal money balances.

38. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 5%, then we would expect the nominal interest rate to be:
a. 10%. c. zero.
b. 7%. d. 2%.

39. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 5%, then we would expect the inflation rate to be:
a. 10%. c. 5%.
b. 7%. d. 2%.

40. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 5%, then we would expect real money balances to:
a. fall. c. remain unchanged.
b. increase. d. to fluctuate.

41. If the inflation rate is 2% and the nominal interest rate is 4% and the money growth rate increases to 3%, then we would expect the nominal interest rate to be:
a. 6%. c. 5%.
b. zero. d. 2%.

42. If the inflation rate is 2% and the nominal interest rate is 4% and the money growth rate increases to 5%, then we would expect the inflation rate to be:
a. 6%. c. 5%.
b. 7%. d. 2%.

43. A decrease in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. a decrease in the price level.
b. an increase in money demand. d. all of the above.

44. A decrease in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. an increase in the price level.
b. a decrease in money demand. d. all of the above.

45. A decrease in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. an increase in the price level.
b. an increase in money demand. d. all of the above.

46. A decrease in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. a decrease in the price level.
b. a decrease in money demand. d. all of the above.

47. A decrease in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. a decrease in the inflation rate.
b. an increase in money demand. d. all of the above.

48. A decrease in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. an increase in the inflation rate.
b. a decrease in money demand. d. all of the above.

49. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate decreases to 2%, then we would expect the inflation rate to be:
a. 8%. c. 5%.
b. 7%. d. 2%.

50. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 2%, then we would expect the nominal interest rate to be:
a. 4%. c. 5%.
b. 7%. d. 2%.

51. Inflation is
a. a continuing upward movement in the price level. c. a continuing upward movement in the prices of oil and food.
b. a one-time upward movement in the price level. d. a continuing upward movement in the price of labor.

52. Deflation is
a. a one-time downward movement in the price level. c. a declining, but positive, rate of inflation.
b. a continuing downward movement in the price level. d. a continuing upward movement in the price of labor.

53. From 2000 to 2006, the rate of change of prices in Japan was -0.2% per year. This is an example of
a. inflation. c. deflation.
b. hyperinflation. d. disinflation.

54. Cross-country data on inflation rates shows a strong and positive association with the
a. disinflation rate for the previous period. c. growth rate of nominal currency.
b. nominal and real interest rates. d. growth rate of real currency.

55. Households which form rational expectations will
a. exhibit procyclical patterns in their errors over time. c. exhibit deflationary patterns in their errors over time.
b. exhibit countercyclical patterns in their errors over time. d. not exhibit a systematic pattern of errors over time.

56. If the inflation rate between last year and this year is 5%, and the price level last year was 125, then the price level this year is
a. 131.25. c. 120.00.
b. 130.00. d. 100.00.

57. If the inflation rate between last year and this year is -5%, and the price level last year was 125, then the price level this year is
a. 100.00. c. 120.00.
b. 118.75. d. 131.25.

58. Households with rational expectations will
a. make accurate predictions each period. c. make procyclical errors in their predictions.
b. have no errors in their predictions. d. have errors in their predictions.

59. If the nominal interest rate is 7% and the expected inflation rate is 4%, then the
a. expected real interest rate is 3%. c. actual nominal interest rate is 3%.
b. actual real interest rate is 3%. d. expected nominal interest rate is 4%.

60. The Livingston survey
a. asks about 500 randomly-chosen households for their forecasts of the CPI. c. uses prices on indexed bonds to calculate inflation expectations.
b. asks about 50 economists for their forecasts of the CPI. d. uses the real interest rate to calculate estimates of the nominal interest rate.

61. If the interest rate on a regular Treasury bond is 8% and the interest rate on an indexed bond is 3%, then the
a. real interest rate is 5%. c. expected inflation rate is 5%.
b. real interest rate is 8%. d. expected inflation rate is 8%.

62. If the interest rate on a regular Treasury bond is 7% and the interest rate on an indexed bond is 3%, then the
a. expected inflation rate is 10%. c. expected inflation rate is 5%.
b. real interest rate is 7%. d. real interest rate is 3%..

63. In a model with a nonzero rate of inflation, the real rate of return from owning capital
a. equals the real interest rate. c. equals the nominal interest rate.
b. is greater than the real interest rate. d. is greater than the nominal interest rate.

64. In a model with a nonzero rate of inflation, real money demanded depends on
a. the real interest rate. c. the nominal interest rate.
b. the real depreciation rate. d. the nominal depreciation rate.

65. If the inflation rate equals 5% and the total real rate of return from owning capital equals 2%, then the
a. the depreciation rate equals 2%. c. nominal interest rate equals 2%.
b. real interest rate equals 2%. d. nominal interest rate is greater than 2%.

SHORT ANSWER

1. Derive the relationship between nominal and real interest rates.

2. After allowing for inflation expectations why does real money demand still depend on the nominal rate of interest?

3. What advantages are there to modeling money growth as lump-sum transfers?

4. What happens in the market clearing model when the money growth rate increases?

5. What is the government revenue from printing money?

6. If households have rational expectations, would they ever make errors in predicting inflation? Explain briefly.

7. In a model with nonzero inflation, what is the equilibrium relation between the interest rate and the rate of return from owning capital?

ECO 302 Week 8 Quiz

Chapter 12

TRUE/FALSE

1. Government can use its funds to purchase goods or transfer money to people.

2. If a household’s transfer payment less taxes is greater than zero, then government is a net source of funds for that household.

3. A permanent increase in government purchases causes an increase in the real rate of interest.

4. A permanent increase in government purchases increases GDP.

5. A temporary increase in government purchases increases GDP.

6. A temporary increase in government expenditures will reduce gross investment.

7. From 1929 to the present, government expenditures as a ratio to GDP have risen to equal about one-third.

8. U.S. government transfer payments in the form of unemployment insurance are equivalent to about ten percent of GDP.

9. The largest expansions in transfer payments at the U.S. federal level have been in Social Seccurity and Medicare.

10. Across a large sample of countries, the U.S. ratio of total government expenditure to GDP is near the median.

MULTIPLE CHOICE

1. The biggest category of government purchases in the US is:
a. state and local purchases. c. federal government purchases.
b. defense purchases. d. federal transfer payments.

2. Government transfer payment as a percentage of GDP have been:
a. generally rising. c. cyclical.
b. generally falling. d. constant.

3. The fastest growing part of the federal government budget since WWII is:
a. interest payments on the debt. c. transfer payments.
b. defense spending. d. infrastructure.

4. State and local governments purchases include:
a. defense spending. c. social security retirement spending.
b. education spending. d. all of the above.

5. The biggest category of state and local expenditures are:
a. education. c. defense.
b. transfer payments. d. none of the above.

6. State and local governments purchases are about half:
a. interest on debt. c. defense.
b. transfer payments. d. none of the above.

7. The government budget constraint without borrowing is:
a. Gt + Vt = Tt + (Mt – Mt-1 )/P c. Gt – Vt = Tt
b. Gt = Tt + Vt d. Gt – Vt = Tt – (Mt – Mt-1 )/P

8. The government budget constraint is:
a. government purchases less transfer payments equal revenue from money growth less taxes. c. government purchases plus taxes equal transfer payment plus revenue from money creation.
b. government purchases plus transfer payments equal taxes plus revenue from money growth. d. government purchases times transfer payment equals taxes times revenue from money creation.

9. The government’s budget constraint is:
a. Gt + Vt = Tt + (Mt – Mt-1 )/P c. -Gt = Vt – Tt, if revenue from money creation is zero.
b. Gt + Vt – Tt = (Mt – Mt-1 )/P d. all of the above.

10. The government’s budget is:
a. government purchases plus transfer payments equal taxes plus revenue from money creation. c. the negative of government equals transfers less taxes, if revenue from money creation is zero.
b. government purchases plus transfers less taxes equal revenue from money creation. d. all of the above.

11. If there is no revenue from money growth, then the government’s budget constraint without borrowing is:
a. Gt + Vt = Tt. c. Gt = Vt – Tt
b. Gt = Vt + Tt. d. all of the above.

12. If the money supply does not change, then the government’s budget constraint without borrowing is:
a. Gt – Vt = Tt c. -Gt = Vt – Tt
b. Gt = Vt – Tt d. all of the above.

13. Among the government’s sources of funds are;
a. transfer payments. c. government purchases.
b. tax revenue. d. all of the above.

14. Among the government’s sources of funds are;
a. transfer payments. c. real revenue from printing money.
b. government purchases. d. all of the above.

15. Among the government’s uses of funds are;
a. transfer payments. c. real revenue from printing money.
b. tax revenue. d. all of the above.

16. Among the government’s uses of funds are;
a. government purchases. c. real revenue from printing money.
b. tax revenue. d. all of the above.

17. In the market clearing model without government borrowing, the net effect of government on households is an increase in funds of:
a. transfer payments times taxes. c. taxes less transfer payments.
b. transfer payments plus taxes. d. transfer payments less taxes.

18. If a household’s transfer payments less taxes is positive, then the government:
a. is a net source of funds for that household. c. is a net drain on that household.
b. is a net use of fund of funds for that household. d. does not affect that household’s budget constraint.

19. If a household’s transfer payments less taxes is negative, then the government:
a. is a net source of funds for that household. c. is a net subsidizer of that household.
b. is a net use of fund of funds for that household. d. does not affect that household’s budget constraint.

20. According to the market clearing model a permanent increase in government purchases causes:
a. a decrease in consumption. c. an increases in real GDP.
b. an increases in the real interest rate. d. all of the above.

21. According to the market clearing model a permanent increase in government purchases leads to:
a. an increase in capital utilization. c. an increase in the demand for capital services.
b. a decrease in the supply of capita services. d. no change in the real rate of interest.

22. According to the market clearing model a permanent increase in government purchases causes an increase in:
a. real GDP. c. the real wage rate.
b. the real interest rate. d. none of the above.

23. In the market clearing model the intertemporal substitution effect from a permanent increase in government purchases:
a. works through real interest rate changes. c. works through real interest rate and real wage changes.
b. works through real wage changes. d. does not exist because the real interest rate and real wage rated do not change.

24. In the market clearing model a permanent decrease in government purchase will:
a. increase consumption. c. increase the real wage rate.
b. increase the real interest rate. d. all of the above.

25. In the market clearing model a permanent increase in government purchases does not increase the real wage because:
a. labor supply and labor demand increase about the same amount. c. labor demand is downward sloping.
b. labor supply is fixed. d. neither labor demand nor labor supply shift due to the permanent increase in government purchases.

26. In the market clearing model a permanent increase in government purchases does not increase the real interest rate because:
a. the supply of capital services and demand for capital services increase about the same amount. c. the demand for capital services is downward sloping.
b. neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases. d. the supply of capital services is upward sloping.

27. According to the market clearing model, a one unit permanent increase in government purchases causes:
a. GDP to rise about one unit. c. gross investment to fall about one unit.
b. consumption to fall about one unit. d. all of the above.

28. According to the market clearing model a one unit permanent increase in government purchases causes:
a. no change in GDP. c. no change in gross investment.
b. consumption to fall about one unit. d. all of the above.

29. US data since the end of the Korean war shows that permanent changes in government purchases are:
a. acyclical as the model predicts. c. acyclical as opposed to the model that predicts they will be procyclical.
b. procyclical as the model predicts. d. countercyclical as opposed to the model that predicts they will be acyclical.

30. Since the end of the Korean war, US permanent government spending has:
a. increased as GDP has increased. c. had little relationship to fluctuations in real GDP.
b. decreased as GDP has increased. d. decreased when GDP decreased.

31. The model predicts that a temporary increase in government purchases causes:
a. an increase in consumption. c. a reduction in gross investment.
b. a reduction in real GDP. d. all of the above.

32. The model predicts that a temporary increase in government expenditures will lead to:
a. a decrease in consumption. c. a decrease in GDP.
b. an increase in investment. d. none of the above.

33. People might work more during a war time temporary increase in government purchases because of:
a. patriotism. c. increased investment the model predicts.
b. the increase in the MPL as the model predicts. d. all of the above.

34. People might work more during a war time temporary increase in government purchases because of:
a. a military draft or voluntary enlistment takes away some primary household earners and to maintain consumption as the model predicts, those households may have other members work who did not previously. c. increased investment leading to hire capital stocks that increase the demand for labor as the model predicts.
b. the increase in the MPL leading to an increase in the demand for labor and increased capital utilization as the model predicts. d. all of the above.

35. The real wage increase in the data during war time might be overstated as:
a. price controls lead to understating the price level. c. because capital utilization falls in war time.
b. labor demand is so high in war time. d. all of the above.

36. With a temporary change in government purchases the model predicts investment is:
a. acyclical. c. countercylical.
b. procyclical. d. exogenous.

37. With a permanent change in government purchases the model predicts consumption is:
a. acyclical. c. countercylical.
b. procyclical. d. exogenous.

38. The model predicts that a temporary decrease in government purchases causes:
a. an increase in consumption. c. an increase in gross investment.
b. a reduction in real GDP. d. all of the above.

39. According to the market clearing model, a one unit temporary decrease in government purchases causes:
a. no change in GDP. c. no change in the interest rate.
b. investment to rise about one unit. d. all of the above.

40. According to the market clearing model, a one unit temporary decrease in government purchases causes:
a. a one unit decrease in GDP. c. consumption to rise about one unit.
b. gross investment to rise about one unit. d. all of the above.

41. The model predicts that a temporary decrease in government expenditures will lead to:
a. an increase in real wages. c. a decrease in GDP.
b. a decrease in the real interest rate. d. none of the above.

42. The model predicts that a temporary decrease in government purchases causes:
a. an increase in consumption. c. an increase in gross investment.
b. a reduction in real GDP. d. all of the above.

43. The model predicts a permanent decrease in government purchases causes:
a. an increase consumption. c. an increases real GDP.
b. an increases the real interest rate. d. all of the above.

44. The model predicts a permanent decrease in government purchases leads to:
a. an increase in capital utilization. c. an increase in the demand for capital services.
b. a decrease in the supply of capita services. d. no change in the real rate of interest.

45. According to the model a permanent decrease in government purchases does not increase the real wage according to the market clearing model because:
a. labor supply and labor demand decrease about the same amount. c. labor demand is downward sloping.
b. labor supply is fixed. d. neither labor demand nor labor supply shift due to the permanent increase in government purchases.

46. According to the model a permanent decrease in government purchases does not decrease the real interest rate according to the market clearing model because:
a. the supply of capital services and demand for capital services decrease about the same amount. c. the demand for capital services is downward sloping.
b. neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases. d. the supply of capital services is upward sloping.

47. A temporary decrease in government purchases does not increase the real wage according to the market clearing model because:
a. labor supply and labor demand decrease about the same amount. c. labor demand is downward sloping.
b. labor supply is fixed. d. neither labor demand nor labor supply shift due to the permanent increase in government purchases.

48. A temporary decrease in government purchases does not decrease the real interest rate according to the market clearing model because:
a. the supply of capital services and demand for capital services decrease about the same amount. c. the demand for capital services is downward sloping.
b. neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases. d. the supply of capital services is upward sloping.

49. A temporary increase in government purchases does not increase the real wage according to the market clearing model because:
a. labor supply and labor demand increase about the same amount. c. labor demand is downward sloping.
b. labor supply is fixed. d. neither labor demand nor labor supply shift due to the permanent increase in government purchases.

50. A temporary increase in government purchases does not increase the real interest rate according to the market clearing model because:
a. the supply of capital services and demand for capital services increase about the same amount. c. the demand for capital services is downward sloping.
b. neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases. d. the supply of capital services is upward sloping.

51. Goernment expediture as a ratio to GDP since the 1980s has
a. stabilized at about 1/3. c. grown from about 1/3 to 1/2.
b. grown from about 1/10 to 1/5. d. declined from about 1/3 to 1/5.

52. Data across more than 50 countries shows that the U.S. ratio of government expediture to GDP is
a. much higher than the median ratio. c. slightly below the median ratio.
b. one of the two highest ratios. d. one of the two lowest ratios.

53. At the federal level, the largest expansions in transfer payments have been from increases in
a. unemployment insurance c. welfare.
b. Social Security. d. tax rebates.

54. U.S. data show that the ratio of Social Security, Medicare and state and local Medicaid payments to GDP is
a. less than 1%. c. about 50%.
b. more than 98%. d. about 10%.

55. When the Barro model assumes lump-sum taxes, this means
a. real taxes are independent of a household’s income. c. nominal taxes depend negatively on a household’s consumption.
b. nominal taxes depend positively on a household’s income. d. there is no tax on inheritances.

56. Suppose real government purchases equal $800 billion and real government transfers equal $100 billion. If the nominal quantity of money is constant, then real tax revenues must
a. equal $700 billion. c. be greater than $8,100 billion.
b. equal $900 billion. d. be less than $100 billion.

57. Real disposable income for a household equals
a. the real return on capital services. c. real income available after taxes.
b. the nominal wage rate. d. the real return on capital services after taxes.

58. If a household’s real taxes increase by one unit, then
a. real government transfers to the household decreae by one unit. c. the real return on capital services falls by one unit.
b. real government transfers to the househould increase by one unit. d. real disposable income falls by one unit.

59. Adding government to the Barro model affects the household budget constraint by
a. adding the present value of real transfers net of real taxes as a source of funds. c. adding the present value of real transfers plus real taxes as a use of funds.
b. adding and subtracting the present value of real transfers net of real taxes as a source of funds, for no net effect. d. subtracting the present value of real transfers net of real taxes as a use of funds.

60. A permanent increase in government purchases will
a. shift the demand for capital services outward. c. shift the supply of capital services inward.
b. not shift the demand or supply of capital services. d. shift the supply of capital services outward.

61. A permanent increase in government purchases will
a. shift the demand curve for labor invward. c. not shift the supply or demand curves for labor.
b. shift the supply curve for labor outward.. d. shift the demand curve for labor outward.

62. One empirical prediction from the model which includes government purchases is that
a. permanent changes in real government purchases increase real GDP. c. permanent changes in nominal government purchases increase nominal GDP.
b. permanent changes in real government purchases decrease real GDP. d. permanent changes in real government purchases have little impact on real GDP.

63. One difference between a permanent and temporary increase in government purchases is that with a temporary increase,
a. expected real disposable income in future years is unchanged. c. the expected real wage rate in future years is higher.
b. expected real disposable income in future years is higher. d. the expected real wage rate in future years is lower.

64. A temporary increase in government purchases, unlike a permanent increase,
a. comes mostly at the expense of a loss of transfer payments. c. increases the real wage rate in future years..
b. comes mostly at the expense of a loss in gross investment. d. comes mostly at the expense of a lower real interest rate.

65. The data on temporary increases in government purchases during wartime
a. do not support the prediction that gross investment would rise. c. do not support the prediction that GDP would be unchanged.
b. do not support the prediction that consumption would rise. d. do support the prediction that GDP would be unchanged.

SHORT ANSWER

1. What is the government’s budget constraint without government borrowing and what does it show us?

2. How does government without borrowing affect the household’s budget constraint?

3. What are the effects of a permanent increase in government purchases in the market clearing model?

4. What are the effects of a temporary increase in government purchases?

5. What has been the US experience in war time temporary increase in government purchases and how do they conform with the predictions of the model?

Chapter 13

TRUE/FALSE

1. The marginal tax rate is the change in taxes when taxable income change one unit.

2. The term (1 – w) is the faction of labor income the worker gets to keep.

3. An increase in the marginal tax on labor income, increases the supply of labor.

4. An increase in the marginal tax on labor income, decreases the demand for capital services.

5. A decrease in the marginal tax on asset income, reduces investment short run and the capital stock and GDP in the long run.

6. An increase in the marginal tax rate on labor income reduces overall market activity, as gauged by GDP.

7. The largest sources of tax revenue for the U.S. federal government include the individual income tax and social-insurance contributions.

8. The largest source of tax revenue for the U.S. federal government is the corporate-profit tax.

9. U.S. data show that state and local government revenues currently far exceed federal government revenues.

10. A graduated income-tax rate has a marginal tax rate which equals the average tax rate.

MULTIPLE CHOICE

1. The US Federal government gains revenue from:
a. individual income taxes. c. excise taxes.
b. social insurance taxes. d. all of the above.

2. The US Federal government gains revenue from:
a. property taxes. c. UN grants.
b. social insurance taxes. d. all of the above.

3. The US Federal government gains revenue from:
a. property taxes. c. individual income taxes.
b. sales taxes. d. all of the above.

4. The US Federal government gains revenue from:
a. revenue from money creation. c. sales taxes.
b. social insurance taxes. d. all of the above.

5. The US Federal government gains revenue from:
a. property taxes. c. UN grants.
b. excise taxes and customs. d. all of the above.

6. The US state and local governments gains revenue from:
a. property taxes. c. sales taxes.
b. income taxes. d. all of the above.

7. The US state and local governments gains revenue from:
a. property taxes. c. sales taxes.
b. income taxes. d. all of the above.

8. The US state and local governments gains revenue from:
a. property taxes. c. revenue from money creation.
b. customs. d. all of the above.

9. The US state and local governments gains revenue from:
a. revenue from money creation. c. sales taxes.
b. customs. d. all of the above.

10. The US state and local governments gains revenue from:
a. customs. c. revenue from money creation.
b. federal grants. d. all of the above.

11. The US state and local governments gains revenue from:
a. revenue from money creation. c. income taxes.
b. customs. d. all of the above.

12. The marginal income tax rate is:
a. taxes divided by income. c. income divide by taxes.
b. the change in taxes when income changes one dollar. d. the change in income when taxes change one dollar.

13. The average income tax rate is:
a. income taxes divided by income. c. income divide by income taxes.
b. the change in income taxes when income changes one dollar. d. the change in income when income taxes change one dollar.

14. The average marginal income tax rate is:
a. the marginal tax rate of the average household. c. the change in income taxes divided by income.
b. the average tax rate of the marginal household. d. all of the above.

15. A graduate-rate tax structure is one:
a. whose marginal rate increases as income increases. c. whose average rate equals the marginal rate.
b. that has a flat rate. d. whose marginal rate decreases as income increases.

16. A flat-rate tax structure is one:
a. whose marginal rate increases as income increases. c. whose average rate equals the marginal rate.
b. that has graduated rates. d. whose marginal rate decreases as income increases.

17. One less the marginal tax on wages, (1 – w) is:
a. the fraction of wage income paid in taxes. c. the fraction of income the government receives.
b. the fraction of wage income the worker gets to keep. d. the average marginal tax rate.

18. The after tax real wage is:
a. (w/P)• w c. (w/P)•(1 – w)
b. (w/P)•L•(1 – w) d. (w/P)/(1 – w)

19. If government purchases are constant, then an increase in the marginal income tax rate, w, leads to:
a. a positive income effect. c. no income effect.
b. a negative income effect. d. a marginal income effect.

20. If the marginal tax rate on income, w, changes but government purchases don’t then the government could have:
a. lowered some other lower marginal rate wage tax like the social security payroll tax. c. raised some income tax deductions.
b. the increased revenue due to the higher marginal tax rate is all used for real transfers. d. all of the above.

21. If the marginal tax rate on income, w, changes but government purchases don’t then the government could have:
a. lowered some other lower marginal rate wage tax like the social security payroll tax. c. reduced some income tax deductions.
b. reduced real transfers. d. all of the above.

22. If the marginal tax rate on income, w, changes but government purchases don’t then the government could have:
a. raised some other lower marginal rate wage tax. c. reduced some income tax deductions.
b. used all the increased revenue due to the higher marginal tax rate for real transfers. d. all of the above.

23. If the marginal tax rate on income, w, changes but government purchases don’t then the government could have:
a. raised some other lower marginal rate wage tax. c. raised some income tax deductions.
b. lowered real transfers. d. all of the above.

24. If the real marginal tax rate, w, increases in the market clearing model then:
a. the supply of labor decreases. c. real output, Y, declines.
b. the demand for capital decreases. d. all of the above.

25. If the real marginal tax rate, w, increases in the market clearing model then:
a. the supply of labor decreases. c. real output, Y, rises.
b. the demand for capital increases. d. all of the above.

26. If the real marginal tax rate, w, increases in the market clearing model then:
a. the supply of labor increases. c. real output, Y, declines.
b. the demand for capital increases. d. all of the above.

27. If the real marginal tax rate, w, increases in the market clearing model then:
a. the supply of labor increases. c. real output, Y, rises.
b. the demand for capital decreases. d. all of the above.

28. The after tax real interest rate is:
a. r/ r c. (1- r)•r
b. (1+ r)/(1+r) d. r/r

29. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a. household current consumption will rise compared to future consumption. c. the after tax real interest rate falls.
b. current investment will fall. d. all of the above.

30. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a. household current consumption will rise compared to future consumption. c. the after tax real interest rate rises.
b. current investment will rise. d. all of the above.

31. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a. household current consumption will fall compared to future consumption. c. the after tax real interest rate rises.
b. current investment will fall. d. all of the above.

32. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a. household current consumption will fall compared to future consumption. c. the after tax real interest rate falls.
b. current investment will rise. d. all of the above.

33. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a. increases the stock of capital and real GDP. c. decreases the stock of capital and real GDP.
b. increases the stock of capital and decreases real GDP. d. decreases the stock of capital and increases real GDP.

34. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a. decreases GDP. c. lowers consumption.
b. decrease the capital stock. d. all of the above.

35. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a. increases GDP. c. raises consumption.
b. decrease the capital stock. d. all of the above.

36. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a. decreases GDP. c. raises consumption.
b. increase the capital stock. d. all of the above.

37. With an increase in government purchases financed by an increase in the marginal tax rate on labor income, the change in labor supply depends on whether the:
a. negative substitution effect is bigger than the positive income effect. c. positive substitution effect is bigger than the negative income effect.
b. negative substitution effect is bigger than the negative income effect. d. positive substitution effect is bigger than the positive income effect.

38. An increase in government purchases financed by an increase in the marginal tax rate on labor income, increases the quantity of labor supplied, if the:
a. negative substitution effect is bigger than the positive income effect. c. positive substitution effect is bigger than the negative income effect.
b. negative substitution effect is smaller than the positive income effect. d. positive substitution effect is smaller than the negative income effect.

39. An increase in government purchases financed by an increase in the marginal tax rate on labor income, decreases the quantity of labor supplied, if the:
a. negative substitution effect is bigger than the positive income effect. c. positive substitution effect is bigger than the negative income effect.
b. negative substitution effect is smaller than the positive income effect. d. positive substitution effect is smaller than the negative income effect.

40. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor income, then:
a. the income effect would be toward a decrease in labor supply. c. the substitution effect would be towards an increase in labor supply.
b. the overall effect on labor supply is uncertain. d. all of the above.

41. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor income, then:
a. the income effect would be toward a decrease in labor supply. c. the substitution effect would be towards an decrease in labor supply.
b. the overall effect on labor supply is negative. d. all of the above.

42. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor income, then:
a. the income effect would be toward an increase in labor supply. c. the substitution effect would be towards an increase in labor supply.
b. the overall effect on labor supply is positive. d. all of the above.

43. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor income, then:
a. the income effect would be toward an increase in labor supply. c. the substitution effect would be towards a decrease in labor supply.
b. the overall effect on labor supply is uncertain. d. all of the above.

44. If the marginal tax on labor income, w, rises then the tax receipts of the government:
a. rise. c. stay the say.
b. fall. d. may rise, fall or stay the same.

45. If transfer payments are related to characteristics of households like income, then an increase in the marginal tax on labor income, w,:
a. will have smaller effects in the market clearing model. c. will have the same effects in the market clearing model.
b. will have stronger effects in the market clearing model. d. will have no effects in the market clearing model.

46. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a. does not change the stock of capital c. does not change the market clearing rental price of capital.
b. does not change real GDP. d. all of the above.

47. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a. does not change the stock of capital c. reduces the market clearing rental price of capital.
b. decreases real GDP. d. all of the above.

48. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a. raises the stock of capital c. does not change the market clearing rental price of capital.
b. increases real GDP. d. all of the above.

49. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a. raises the stock of capital c. reduces the market clearing rental price of capital.
b. does not change real GDP. d. all of the above.

50. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a. raises change the stock of capital c. increases gross investment.
b. increases real GDP. d. all of the above.

51. From 1929 to the present, total government revenue grew to be about
a. 30% of GDP. c. 10% of GDP.
b. 50% of GDP. d. 1% of GDP.

52. Before World War II, state and local government revenue comprised about
a. less than one-third of total government revenues. c. 10% of total government revenues.
b. more than half of total government revenues. d. 0% of total government revenues.

53. Since World War II, state and local government revenues have been a
a. growing share of total government revenues. c. shrinking share of total government revenues.
b. stable share of total government revenues. d. miniscule share of total government revenues.

54. Individual income taxes in the U.S.
a. began during the Revolution. c. affect only the richest 10% of people.
b. are an insignficant source of revenue. d. mostly began in 1913.

55. The major sources of federal government revenue, in descending order of their importance, are
a. individual income taxes, social-insurance contributions, and corporate profits taxes. c. payments from the Federal Reserve, corporate profits taxes, and individual income taxes.
b. social-insurance contributions, corporate profits taxes, and individual income taxes. d. corporate profits taxes, payments from the Federal Reserve, and individual income taxes.

56. The single largest source of federal government revenue from those listed below is
a. taxes on corporate profits. c. excise and customs taxes.
b. individual income taxes. d. payments from the Federal Reserve to the U.S. Treasury.

57. The U.S. federal income-tax structure is designed so that
a. all citizens pay a flat marginal tax rate. c. the marginal tax rate generally rises with income.
b. the average tax rate falls as income rises. d. all citizens pay a flat average tax rate.

58. Data on U.S individual income taxes shows that the income tax
a. is not graduated, because higher-income citizens pay a high share of the taxes. c. is flat, because higher-income citizens pay a low share of the taxes.
b. is flat, because higher-income citizens pay a high share of the taxes. d. is graduated, because higher-income citizens pay a high share of the taxes.

59. Data on U.S adjusted gross income show that the income tax is progressive because
a. high-income citizens pay a high share of taxes relative to the share of income they receive. c. low-income citizens pay a high share of taxes relative to the share of income they receive.
b. high-income citizens pay a low share of taxes relative to the share of income they receive. d. all citizens pay a high share of taxes relative to the share of income they receive.

60. Historical data on U.S. marginal taxes rates show, that on average, the marginal tax rate
a. fell during the Korean War in the 1950s to an all-time low. c. were at their highest in the pre-World War II era.
b. rose after World War II to a high of about 40% in 1981. d. none of the above.

61. The U.S. Social Security contribution or tax on individuals
a. is a graduated tax for incomes up to $94,200. c. is a flat tax for incomes up to $94,200.
b. is a graduated tax for all incomes, with no upper limit. d. is a progressive tax for all incomes up to $10,000.

62. The U.S. Social Security contribution or tax on individuals has a marginal tax rate which equals the average tax rate. This makes it
a. a progressive tax. c. an alternating tax.
b. a depreciating tax. d. a flat tax.

63. An increase in the marginal tax rate on labor income will shift the
a. labor supply curve leftward. c. labor demand curve rightward.
b. labor supply curve rightward. d. labor demand curve leftward.

64. An increase in the marginal tax rate on labor income will shift the
a. supply curve for capital services leftward. c. demand curve for capital services leftward.
b. supply curve for capital services rightward. d. demand curve for capital services rightward.

65. A decrease in the marginal tax rate on labor income will shift the
a. labor supply curve leftward. c. labor demand curve rightward.
b. labor supply curve rightward. d. labor demand curve leftward.

66. The Laffer Curve shows that total real tax revenue
a. rises continuously as the marginal tax rate rises. c. falls, then rises, as the marginal tax rate rises.
b. falls continuously as the marginal tax rate rises. d. rises, then falls, as the marginal tax rate rises.

SHORT ANSWER

1. What are the effects of an increase in the marginal tax rate on labor income in the market clearing model?

2. What does (1 – w) tell us and what are the real after tax returns on assets and labor if income from them are taxed?

3. What are the short run effects of an increase in the marginal tax rate on assets income in the market clearing model?

4. What are the long run effects of an increase in the marginal tax rate on asset income in the market clearing model?

5. Under what conditions in the market clearing model will the quantity of labor supplied increase when government purchases are increased and financed by an increase in the marginal tax rate on labor income?

6. What are the major sources of revenue for the U.S. government, and which are most important today?

7. Explain the difference between a graduated-rate tax and a flat-rate tax.

ECO 302 Week 9 Quiz

Chapter 14

TRUE/FALSE

1. When a country has a deficit, its debt is growing.

2. A pay as you go social security system raises the capital stock.

3. If government budget is in deficit, then real government saving is in surplus.

4. If the government runs a deficit, households will feel wealthier.

5. A budget deficit caused by changing labor income taxes changes the labor and production.

6. The debt-to-GDP ratio typically rises during a recession.

7. The major peaks in the ratio of public debt to GDP in the U.S. reflect expenditures on Social Security.

8. Real national saving equals net investment.

9. Real government saving is positive when the real public debt increases.

10. If government expediture exceeds government revenue, then the government has a budget surplus.

MULTIPLE CHOICE

1. The governments sources of funds include:
a. taxes. c. borrowing.
b. printing money. d. all of the above.

2. The governments sources of funds include:
a. taxes. c. paying interest on past bonds.
b. government purchases. d. all of the above.

3. The governments sources of funds include:
a. transfer payments. c. paying interest on the government debt.
b. printing money. d. all of the above.

4. The governments sources of funds include:
a. government purchases. c. borrowing.
b. transfer payments. d. all of the above.

5. The governments uses of funds include:
a. government purchases. c. paying interest on the past government debt.
b. transfer payments. d. all of the above.

6. The governments uses of funds include:
a. government purchases. c. printing money.
b. borrowing. d. all of the above.

7. The governments uses of funds include:
a. printing money. c. taxes.
b. transfer payments. d. all of the above.

8. The governments uses of funds include:
a. borrowing. c. paying interest on the past government debt.
b. printing money. d. all of the above.

9. A balanced government budget is one where:
a. government purchases equal taxes. c. the governments real savings is zero.
b. government debt is zero. d. all of the above.

10. Total bond holding of all households is Bgt because:
a. the quantity of all private bonds held by the public is zero. c. the public views government bonds as less risky than private bonds.
b. the quantity of all government bonds held by the public is zero. d. the public views private bonds as less risky than government bonds.

11. Total bond holding of all households is equal to
a. the quantity of all private bonds. c. the quantity of all private bonds plus all government bonds.
b. the quantity of all government bonds. d. the quantity of all private bonds minus all government bonds.

12. If money and the price level are constant, then the government’s real budget deficit is:
a. (Bgt – Bgt-1)/P. c. (Bt + Bgt)/P.
b. Bgt/P. d. none of the above.

13. If money and the price level are constant, then the government’s real budget debt is:
a. (Bgt – Bgt-1)/P. c. (Bt + Bgt)/P.
b. Bgt/P. d. none of the above.

14. If the government reduces taxes by $1 this year without raising taxes or printing more money, then
a. future tax liabilities will rise by $1 plus the interest, R, that must be paid on the borrowing. c. future tax liabilities will fall by $1 plus the interest, R, that must be paid on the borrowing.
b. future tax liabilities will rise by $1 less the interest, R, that must be paid on the borrowing. d. future tax liabilities will fall by $1 less the interest, R, that must be paid on the borrowing.

15. Ricardian equivalence implies that a government budget deficit:
a. increases current consumption. c. reduces national saving.
b. increases future tax liabilities. d. all of the above.

16. Ricardian equivalence holds:
a. only for year to year changes in the governments budget. c. only with a government deficit not a surplus.
b. no matter how long until the bonds are to be paid off. d. only with a government surplus not a deficit.

17. A strategic budget deficit is designed to:
a. increase GDP. c. constrain the behavior of future governments.
b. increase economic activity. d. all of the above.

18. The standard view of the budget deficit is that it:
a. reduces the GDP in the long run. c. reduces the capital stock in the long run.
b. reduces investment. d. all of the above.

19. The standard view of the budget deficit is that it:
a. reduces the GDP in the long run. c. increases the capital stock in the long run.
b. increases investment. d. all of the above.

20. The standard view of the budget deficit is that it:
a. increases the GDP in the long run. c. increases the capital stock in the long run.
b. reduces investment. d. all of the above.

21. The standard view of the budget deficit is that it:
a. increases the GDP in the long run. c. reduces the capital stock in the long run.
b. increases investment. d. all of the above.

22. The standard view of the budget deficit is that a deficit:
a. does not affect the economy in the long run. c. does not affect the economy in the short run.
b. and the public debt are a burden on the economy. d. encourages economic growth.

23. Households may feel wealthier due to a tax cut, if:
a. they are very concerned about future generations. c. they are using an infinite planning horizon.
b. they expect the bonds created by the deficit to be paid off after their lifetime. d. they plan to leave a bequest to their heirs.

24. Households may feel wealthier due to a tax cut, if:
a. they are not able to borrow as much against future earnings as they wish. c. they care a lot about future generations.
b. they are not able to lend present earnings as much as they wish. d. they plan to leave a bequest to their heirs.

25. If households ignore effects on future generations, a pay as you go social security system:
a. reduces current national savings. c. reduces the future capital stock.
b. reduces investment. d. all of the above.

26. If households ignore effects on future generations, a pay as you go social security system:
a. reduces current national savings. c. raises the future capital stock.
b. raises investment. d. all of the above.

27. If households ignore effects on future generations, a pay as you go social security system:
a. raises current national savings. c. raises the future capital stock.
b. reduces investment. d. all of the above.

28. If households ignore effects on future generations, a pay as you go social security system:
a. raises current national savings. c. reduces the future capital stock.
b. raises investment. d. all of the above.

29. If households ignore effects on future generations when a pay as you go social security system starts, the then elderly:
a. have a positive income effect on their consumption. c. receive low returns on any taxes paid into the system.
b. receive benefits that in present value is less the present value of their contributions. d. all of the above.

30. If households ignore effects on future generations, when a pay as you go social security system starts, the then elderly:
a. have a negative income effect on their consumption. c. receive low returns on any taxes paid into the system.
b. receive benefits that in present value is greater than the present value of their contributions to the system. d. all of the above.

31. If households ignore effects on future generations, a pay as you go social security system:
a. increases consumption. c. reduces national saving.
b. reduces the capital stock in the long run. d. all of the above.

32. If households ignore effects on future generations, a pay as you go social security system:
a. increases consumption. c. increases national saving.
b. increases the capital stock in the long run. d. all of the above.

33. If households ignore effects on future generations, a pay as you go social security system:
a. decreases consumption. c. raises national saving.
b. reduces the capital stock in the long run. d. all of the above.

34. If households ignore effects on future generations, a pay as you go social security system:
a. decreases consumption. c. reduces national saving.
b. increases the capital stock in the long run. d. all of the above.

35. If households ignore effects on future generations, a pay as you go social security system:
a. reduces investment. c. reduces private saving.
b. reduces GDP in the long run. d. all of the above.

36. If households ignore effects on future generations, a pay as you go social security system:
a. reduces investment. c. increases private saving.
b. increases GDP in the long run. d. all of the above.

37. If households ignore effects on future generations, a pay as you go social security system:
a. raises investment. c. raises private saving.
b. reduces GDP in the long run. d. all of the above.

38. If households ignore effects on future generations, a pay as you go social security system:
a. raises investment. c. reduces private saving.
b. increases GDP in the long run. d. all of the above.

39. A pay as you go social security system only increase consumption and reduces investment, if:
a. households leave bequests. c. if the planning horizon is overlapping generations.
b. if households neglect the adverse affects on their descendants. d. households increase their savings.

40. If currently alive households take full account of the negative affects of a pay as you go social security system on their descendants, then the:
a. effects are magnified. c. effects are exponential.
b. effects are nil. d. effects are unchanged.

41. Open market operations amount to:
a. printing more money and raising taxes and lowering taxes and raising the public debt. c. printing more money and raising taxes and lowering taxes and raising the public debt.
b. printing less money and reducing taxes and raising taxes and reducing the public debt. d. printing more money and reducing taxes and raising taxes and reducing the public debt.

42. By varying its budget deficit, a government can:
a. change the timing of taxes. c. avoid accumulation of government debt.
b. avoid having to raise taxes to pay for a deficit. d. all of the above.

43. If the time path of government purchases does not change and the government cuts lump sum taxes, then:
a. real GDP does not change. c. real gross investment does not change.
b. real consumption does not change. d. all of the above.

44. If the time path of government purchases does not change and the government cuts lump sum taxes, then:
a. real GDP does not change. c. real gross investment falls.
b. real consumption increases. d. all of the above.

45. If the time path of government purchases does not change and the government cuts lump sum taxes, then:
a. real GDP does rise. c. real gross investment rises.
b. real consumption does not change. d. all of the above.

46. If the time path of government purchases does not change and the government cuts lump sum taxes, then:
a. real GDP falls. c. real gross investment does not change.
b. real consumption falls. d. all of the above.

47. If the time path of government purchases does not change and the government cuts lump sum taxes, then:
a. the interest rate does not change. c. the future capital stock does not change.
b. the real wage rate does not change. d. all of the above.

48. If the time path of government purchases does not change and the government cuts lump sum taxes, then:
a. the interest rate rises. c. the future capital stock does not change.
b. the real wage rate falls. d. all of the above.

49. If the time path of government purchases does not change and the government cuts lump sum taxes, then:
a. the interest rate does not change. c. the future capital stock falls.
b. the real wage rate rises. d. all of the above.

50. If the time path of government purchases does not change and the government cuts current labor income taxes, then:
a. labor supply is shifted to the future. c. present GDP is reduced.
b. labor supply is shifted to the present. d. future GDP is increased.

51. If the time path of government purchases does not change and the government cuts current assets income taxes, then:
a. households save more and consume less in the present. c. households save less and consume more in the present.
b. households save and consume less in the present. d. households save and consume more in the present.

52. The major peaks in the ratio of public debt to GDP in the U.S. reflect
a. financing of wartime expenditures. c. major economic expansions.
b. financing of Social Security. d. major increases in technology.

53. In a business cycle recession, the debt-to-GDP ratio typically
a. falls. c. does not change.
b. rises. d. either (a) or (c).

54. In a business cycle recession, the debt-to-GDP ratio typically
a. falls because of an increase in debt. c. rises because of an increase in debt.
b. falls because of an increase in GDP. d. rises because of an increase in GDP.

55. In a business cycle recession, the debt-to-GDP ratio typically
a. falls because of an increase in debt. c. rises because of a decrease in debt.
b. falls because of an increase in GDP. d. rises because of a decrease in GDP.

56. In a business cycle expansion, the debt-to-GDP ratio typically
a. falls because of an increase in GDP. c. rises because of an increase in debt.
b. falls because of a decrease in GDP. d. rises because of a decrease in debt.

57. Assuming that the nominal quantity of money is constant and there is no inflation, if the real public debt decreases, the government budget shows
a. an increase in the real deficit. c. a decrease in private bonds.
b. an increase in real saving. d. a decrease in printing money.

58. Assuming that the nominal quantity of money is constant and there is no inflation, if the real public debt increases, the government’s
a. rate of money printing is greater than 50%. c. real saving is less than zero
b. real saving equals zero. d. rate of money printing is greater than zero.

59. A government budget surplus
a. is the same as the government’s real saving. c. means that government saving is positive.
b. means that government revenue exceeds its expenditure. d. all of the above.

60. Real national saving equals
a. the change in the capital stock. c. both (a) and (b).
b. net investment. d. net depreciation.

61. Real national saving is
a. the difference between government and household saving. c. both (a) and (b).
b. the sum of government and household saving. d. net depreciation.

62. An open-market operation in which the Federal Reserve purchases bonds will
a. increase the money supply and increase the price level. c. decrease the money supply and decrease real GDP.
b. decrease the money supply and increase the price level. d. decrease the money supply and increase real GDP.

63. An open-market operation in which the Federal Reserve sells bonds will
a. increase the money supply and increase the price level. c. decrease the money supply and decrease the price level.
b. decrease the money supply and increase real GDP. d. decrease the money supply and increase the price level.

64. An open-market operation in which the Federal Reserve purchases bonds will
a. decrease the money supply and increase real GDP. c. decrease the money supply and decrease real GDP.
b. increase the money supply but not change real GDP. d. increase the money supply and increase real GDP.

65. An open-market operation in which the Federal Reserve sells bonds will
a. decrease the money supply and increase real GDP. c. decrease the money supply and decrease real GDP.
b. increase the money supply and increase real GDP. d. increase the money supply but not change real GDP.

SHORT ANSWER

1. What is the government budget constraint when government borrowing is allowed?

2. What are public, private and national saving and what is the implication of real national saving?

3. What are the effects of the government lowering taxes by $1 for one period in the market clearing model with no transfer payments, the money stock fixed, no inflation and with a given time path of government purchases?

4. What is the Ricardian equivalence theorem?

5. Why might a budget deficit make households feel wealthier after a tax cut?

6. In the equillibrium business cycle model, what is the impact of an open market operation purchase by the Federal Reserve?

Chapter 15

TRUE/FALSE

1. If households misperceive prices, they may change real decisions in response to changes in the money supply in the long run.

2. If the actual price level is above the expected price level, then workers’ actual real wage will be below their expected real wage.

3. The real effect of a given monetary shock is larger the more stable the underlying monetary environment.

4. Money can only effect real variables in the short run, if people expect the increase in the money supply.

5. If monetary authorities follow a monetary rule, then monetary policy is more effective in affecting real variables like real GDP.

6. In the price-misperceptions model, market prices adjust to clear markets only very slowly.

7. In the price-misperceptions model, an increase in the price level increases the equilibrium labor input and capital services in the short- and long-run.

8. Discretionary monetary policy is more likely than a policy rule to promote a reputation for the central bank of promoting low inflation.

9. A formal provision in the law to target inflation requires secrecy about the central bank’s activities.

10. Discretionary monetary policy suffers from an incentive for the central bank to sometimes renege on its commitment to low inflation.

MULTIPLE CHOICE

1. We would expect households to have the most complete information about:
a. their own wage rate. c. products purchased occasionally like a automobile.
b. the wage rate available on other jobs. d. all of the above.

2. We would expect households to have the most complete information about:
a. the wage rate available on other jobs. c. products purchased occasionally like a automobile.
b. products they purchase frequently. d. all of the above.

3. We would expect households to have incomplete information about:
a. their own wage rate. c. products purchased occasionally like a automobile.
b. products they purchase frequently. d. all of the above.

4. We would expect households to have incomplete information about:
a. their own wage rate. c. wage rates available on other jobs.
b. products they purchase frequently. d. all of the above.

5. The workers’ perceived real wage rate is:
a. their nominal wage rate divided by the actual price level. c. their nominal wage rate divided by the expected price level.
b. the actual price level divided by their nominal wage rate. d. the expected price level divided by their nominal wage rate.

6. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4, then:
a. the expected real wage rate is greater than the actual real wage rate. c. the expected real wage rate is greater than the actual nominal wage rate.
b. the expected real wage rate is less than the actual real wage rate. d. the actual real wage rate is greater than the actual nominal wage rate.

7. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4, then expected real wage rate is:
a. $10. c. $2.50.
b. $5. d. none of the above.

8. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4, then actual real wage rate is:
a. $10. c. $2.50.
b. $5. d. none of the above.

9. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4, then actual nominal wage rate is:
a. $10. c. $2.50.
b. $5. d. none of the above.

10. If the nominal wage is $10 per hour and the expected price level is 5 and the actual price level is 4, then:
a. the expected real wage rate is greater than the actual real wage rate. c. the expected real wage rate is greater than the actual nominal wage rate.
b. the expected real wage rate is less than the actual real wage rate. d. the actual real wage rate is greater than the actual nominal wage rate.

11. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4, then actual real wage rate is:
a. $10. c. $2.
b. $2.50. d. none of the above.

12. If the nominal wage is $10 per hour and the expected price level is 5 and the actual price level is 4, then expected real wage rate is:
a. $10. c. $2.
b. $2.50. d. none of the above.

13. If the nominal wage is $10 per hour and the expected price level is 5 and the actual price level is 4, then actual nominal wage rate is:
a. $10. c. $2.
b. $2.50. d. none of the above.

14. If the nominal wage rises from $10 per hour in period one to $15 per hour in period 2 as the expected price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period 2:
a. the nominal wage is rising. c. the actual real wage is falling.
b. the expected real wage is rising. d. all of the above.

15. If the nominal wage rises from $10 per hour in period 1 to $15 per hour in period 2 as the expected price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period 2:
a. the nominal wage is falling. c. the actual real wage is falling.
b. the expected real wage is falling. d. all of the above.

16. If the nominal wage rises from $10 per hour in period one to $15 per hour in period 2 as the expected price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period 2:
a. the nominal wage is rising. c. the actual real wage is rising.
b. the expected real wage is falling. d. all of the above.

17. If the nominal wage rises from $10 per hour in period one to $15 per hour in period 2 as the expected price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period 2:
a. the nominal wage is falling. c. the actual real wage is rising.
b. the expected real wage is rising. d. all of the above.

18. In the current period a perceived increase in the real wage, will cause households to:
a. work more. c. consume less leisure.
b. consume more goods. d. all of the above.

19. In the current period a perceived increase in the real wage, will cause households to:
a. work more. c. consume more leisure.
b. consume fewer goods. d. all of the above.

20. In the current period a perceived increase in the real wage, will cause households to:
a. work less. c. consume more leisure.
b. consume more goods. d. all of the above.

21. In the current period a perceived increase in the real wage, will cause households to:
a. work less. c. consume less leisure.
b. consume fewer goods. d. all of the above.

22. If the perceive real wage goes up, workers will supply more labor:
a. unless the actual real wage remains the same or falls. c. in the short run.
b. in the long run. d. all of the above.

23. If the perceive real wage goes up, real GDP increases:
a. unless the actual real wage remains the same or falls. c. in the short run.
b. in the long run. d. all of the above.

24. While price misperceptions can cause an increase labor supply and GDP in the short-run, in the long run:
a. money is neutral. c. labor supply returns to its initial position.
b. money does not affect real GDP. d. all of the above.

25. While price misperceptions can cause an increase in labor supply and GDP in the short-run, in the long run:
a. money is no longer neutral in the model. c. labor supply returns to its initial position.
b. money negatively impacts real GDP. d. all of the above.

26. While price misperceptions can cause an increase in labor supply and GDP in the short-run, in the long run:
a. money is neutral. c. labor supply ultimately declines.
b. money negatively affects real GDP. d. all of the above.

27. While price misperceptions can cause an increase in labor supply and GDP in the short-run, in the long run:
a. money is no longer neutral in the model. c. labor supply falls by more than its initial increase.
b. money does not affect real GDP. d. all of the above.

28. An increase in the money supply:
a. can affect real variables temporarily in the short run. c. can affect nominal variables in the long run.
b. can not affect real variables in the long run. d. all of the above.

29. An increase in the money supply:
a. can affect real variables temporarily in the short run. c. can affect real variables in the long run.
b. can not affect nominal variables in the short run. d. all of the above.

30. An increase in the money supply:
a. can not affect real variables temporarily in the short run. c. can not affect nominal variables in the long run.
b. can not affect real variables in the long run. d. all of the above.

31. An increase in the money supply:
a. can not affect real variables temporarily in the short run. c. can affect nominal variables in the long run.
b. can affect real variables in the long run. d. all of the above.

32. An increase in the money supply and inflation can only affect real variables only:
a. if households perceive it is happening. c. in the long run.
b. if households do not perceive all of the inflation. d. if households expect it.

33. In the short run if households’ perceived money growth and inflation equals the actual money growth and inflation, then
a. money affects real variables like labor supply. c. the model is still neutral even in the short run.
b. money affects real variables like GDP. d. all of the above.

34. Monetary policy authorities can only affect the real economy, if:
a. their actions are anticipated by the public. c. their actions are fully communicated to the public.
b. their actions are consistent and predictable. d. their actions systematically fool the public.

35. A monetary shock of a given size has a larger real effect:
a. the more it is anticipated by the public. c. the more fully it is explained and communicated to the public.
b. the more stable the underlying monetary environment. d. all of the above.

36. Price misperception during a positive technology shock would cause:
a. output or GDP to rise by less than it would without price misperception. c. the expected price level to fall less than the actual price level falls.
b. labor supply to rise by less than it would without price misperception. d. all of the above.

37. Price misperception during a positive technology shock would cause:
a. output or GDP to rise by less than it would without price misperception. c. the expected price level to fall more than the actual price level falls.
b. labor supply to fall by more than it would without price misperception. d. all of the above.

38. Price misperception during a positive technology shock would cause:
a. output or GDP to fall by more than it would without price misperception. c. the expected price level to fall more than the actual price level falls.
b. labor supply to rise by less than it would without price misperception. d. all of the above.

39. Price misperception during a positive technology shock would cause:
a. output or GDP to fall by more than it would without price misperception. c. the expected price level to fall less than the actual price level falls.
b. labor supply to fall by more than it would without price misperception. d. all of the above.

40. Discretionary monetary policy is when the monetary authority:
a. does not commit to future monetary actions. c. never produces a monetary surprise to households.
b. commits to future monetary actions. d. always behaves in a predictable way.

41. A monetary policy rule is when the monetary authority:
a. does not commit to future monetary actions. c. often produces a monetary surprise to households.
b. commits to future monetary actions. d. always behaves in unpredictable ways.

42. The price misperception model predicts:
a. the price level will be procyclical while in US data the price level is countercyclical. c. the real wage is countercyclical while in US data the real wage is procyclical.
b. the nominal quantity of money is procyclical and in US data money is weakly procyclical. d. all of the above.

43. The price misperception model predicts:
a. the price level will be procyclical while in US data the price level is countercyclical. c. the real wage is procyclical and in US data the real wage is procyclical.
b. the nominal quantity of money is countercyclical while in US data money is weakly procyclical. d. all of the above.

44. The price misperception model predicts:
a. the price level will be countercyclical while in US data the price level is countercyclical. c. the real wage is procyclical and in US data the real wage is procyclical.
b. the nominal quantity of money is procyclical and in US data money is weakly procyclical. d. all of the above.

45. The price misperception model predicts:
a. the price level will be countercyclical and in US data the price level is countercyclical. c. the real wage is countercyclical while in US data the real wage is procyclical.
b. the nominal quantity of money is countercyclical while in US data money is weakly procyclical. d. all of the above.

46. Real variables can only be affected by:
a. unperceived changes in the price level. c. expected changes in the price level.
b. perceived changes in the price level. d. actual changes in the price level.

47. Monetary policy can affect real variables in the short run if monetary policy:
a. surprises households. c. is unpredictable.
b. is random. d. all of the above.

48. Monetary policy can affect real variables in the short run if monetary policy:
a. surprises households. c. is predictable.
b. is consistent. d. all of the above.

49. Monetary policy can affect real variables in the short run if monetary policy:
a. is fully explained to households. c. is predictable.
b. is random. d. all of the above.

50. Monetary policy can affect real variables in the short run if monetary policy:
a. is fully communicated to households. c. is unpredictable.
b. is consistent. d. all of the above.

51. In the price-misperceptions model, market prices of goods, wage rates, and rental prices
a. adjust rapidly to clear markets. c. give households complete information.
b. adjust slowly to clear markets. d. give households perfect information.

52. The price-misperceptions model differs from the equilibrium business cycle model in that households
a. no longer serve as providers of capital services. c. find that market-clearing prices move to equilbrium slowly.
b. sometimes misinterpret changes in nominal prices as changes in real prices. d. typically face disequilibrium because prices fail to clear markets.

53. Empirical evidence suggests that money is not always neutral, which is consistent with
a. an equilibrium business-cycle model. c. a price-misperceptions model.
b. a real business-cycle model. d. a wage-imperfections model.

54. In the price-misperceptions model, employers have
a. inaccurate information about wages and accurate information about the price of the output. c. accurate information about wages and the price of the output.
b. inaccurate information about wages and the price of the output. d. accurate information about wages and inaccurate information about the price of the output.

55. In the price-misperceptions model, workers have
a. inaccurate information about wages and accurate information about the price level. c. accurate information about wages and the price level.
b. accurate information about wages and inaccurate information about the price level. d. inaccurate information about wages and the price level.

56. In the price-misperceptions model, a rise in the real wage rate makes the demand curve for labor, in the short run, to
a. become steeper than in an equilibrium business-cycle model. c. depend about expectations about prices, not the actual price used in an equilibrium business-cycle model.
b. become less steep than in an equilibrium business-cycle model. d. remain the same as in an equilibrium business-cycle model.

57. In the price-misperceptions model, a rise in the nominal wage rate makes the supply curve of labor, in the short run,
a. shift to the right compared to an equilibrium business-cycle model. c. shift to the left compared to an equilibrium business-cycle model.
b. become less steep than in an equilibrium business-cycle model. d. remain the same as in an equilibrium business-cycle model.

58. In the price-misperceptions model, an increase in the price level in the short run,
a. lowers the quantity of labor supplied at a given real wage. c. leaves the quantity of labor supplied unchanged.
b. lowers the quantity of labor supplied at a given nominal wage. d. increases the quantity of labor supplied at a given real wage.

59. In the price-misperceptions model, an increase in the price level will, in the long run,
a. lower the quantity of labor supplied at a given real wage. c. leave the quantity of labor supplied unchanged.
b. lower the quantity of labor supplied at a given nominal wage. d. increase the quantity of labor supplied at a given real wage.

60. In the price-misperceptions model, an increase in the price level will, in the short run,
a. increase the equilibrium quantity of labor input and real GDP. c. leave the equilibrium quantity of labor input and real GDP unchanged.
b. lower the equilbirum quantity of labor input and increase real GDP. d. lower the equilibrium quantity of labor input and real GDP.

61. In the price-misperceptions model, an increase in the price level in the short-run
a. decreases the equilibrium quantity of labor input and capital services. c. leaves the equilibrium quantity of labor input and capital services unchanged.
b. increases the equilibrium quantity of labor input and capital services. d. increases the equilibrium quantity of labor input and decreases the equilibrium quantity of capital services.

62. In the price-misperceptions model, an increase in the price level in the long-run
a. decreases the equilibrium quantity of labor input and capital services. c. increases the equilibrium quantity of labor input and decreases the equilibrium quantity of capital services.
b. increases the equilibrium quantity of labor input and capital services. d. leaves the equilibrium quantity of labor input and capital services unchanged.

63. The Lucas hypothesis on monetary shocks says that the real effect of a given size monetary shock is
a. larger, the more stable the underlying monetary environment. c. larger, the less stable the underlying monetary environment.
b. smaller, the more stable the underlying monetary environment. d. independent of the stability of the underlying moentary environment.

64. Empirical evidence shows that, for countries such as the U.S., a monetary shock has
a. little or no relation to real GDP. c. little or no relation to nominal GDP.
b. a significant positive relation to real GDP. d. a signficant negative relation to real GDP.

65. In the price-misperception model, money is
a. endogenous, just as it is in the equilibrium business-cycle model. c. exogenous, but it is endogenous in the equilibrium business-cycle model.
b. exogenous, just as it is in the equilibrium business-cycle model. d. endogenous, but it is exogenous in the equilibrium business-cycle model.

66. Friedman and Schwartz’s Monetary History concludes that the procyclical pattern for money
a. does not exist in historical data for the U.S. from 1867 to 1960. c. cannot be explained entirely by endogenous money.
b. can only be explained during the times the U.S. used a commodity money. d. can be explained entirely by exogenous money.

67. One reason for preferring a rule for monetary policy is that a rule
a. allows for additional discretionary policy. c. ensures that the economy would have a negative rate of inflation.
b. ensures that the economy would have a positive rate of inflation. d. improves the credibility of the monetary authority.

68. Which of the following is likely to promote low and stable inflation?
a. inflation targeting c. a large benefit from temporarily reneging on a stated policy
b. discretionary monetary policy d. none of the above

SHORT ANSWER

1. On what types of prices do households have the best information and on what types of products may they have incomplete information?

2. What are the short run effects of a real wage misperception in the market clearing model?

3. Why even with the possibility of real wage misperceptions is the market clearing model still neutral in the long run?

4. Under what conditions do monetary policy changes have the larger real effects on an economy?

5. What is the difference between discretionary monetary policy and monetary policy under a policy rule?

6. Why might a monetary-policy rule be more likely than discretionary policy to promote low inflation?

ECO 302 Week 10 Quiz

Chapter 16

TRUE/FALSE

1. A model with sticky prices and nominal wages is a disequilibrium model.

2. Menu costs are the posted prices of a firm.

3. In the short run in a model with sticky prices, a monetary surprise affects labor demand and real output.

4. In the long run in a model with sticky prices, a monetary surprise affects labor demand and real output.

5. A new Keynesian model produces a countercyclical pattern of the average product of labor while in the data the average product of labor is weakly procyclical.

6. In the new Keynesian model, an increase in household consumption will increase output by more than the original increase in consumption.

7. In the new Keynesian model, a monetary expansion will decrease output in the short run.

8. In a model with imperfect competition, a firm will set its price equal to its nominal marginal cost.

9. In the Keynesian model with sticky nominal wages, the nominal wage rate is fixed above its market-clearing value.

10. In the Keynesian model with sticky nominal wages, a monetary expansion does not affect the real wage rate.

11. The Federal Funds rate is determined in the market for bonds issued by the U.S. Treasury.

MULTIPLE CHOICE

1. Menu costs are:
a. the posted prices of a firm. c. are set by the government.
b. the costs of changing prices. d. are the long run costs of the firm.

2. Sticky prices are:
a. real prices that do not rapidly respond to changed circumstances. c. nominal prices that do not rapidly respond to changed circumstances.
b. prices set by government. d. prices that can never be changed.

3. In the model of price setting, the demand for the firms product is:
a. positively related to real income in the economy. c. negatively related to the real wage the firm pays.
b. positively related to the firms price relative to the price level. d. all of the above.

4. In the model of price setting, the demand for the firms product is:
a. negatively related to real income in the economy. c. negatively related to the real wage the firm pays.
b. negatively to the firms price relative to the price level. d. all of the above.

5. A firm’s markup ratio is:
a. its price relative to the price level. c. it price relative to its marginal costs.
b. the price level relative to its marginal costs. d. its marginal cost relative to the price level.

6. In the model of price setting, the demand for the firm’s price is:
a. positively related to the markup ratio. c. negatively related to the firm’s marginal product of labor.
b. positively related to the nominal wage the firm pays. d. all of the above.

7. In the model of price setting, the demand for the firm’s price is:
a. positively related to the markup ratio. c. positively related to the firm’s marginal product of labor.
b. negatively related to the nominal wage the firm pays. d. all of the above.

8. In the model of price setting, the demand for the firm’s price is:
a. negatively related to the markup ratio. c. positively related to the firm’s marginal product of labor.
b. positively related to the nominal wage the firm pays. d. all of the above.

9. In the model of price setting, the demand for the firm’s price is:
a. negatively related to the markup ratio. c. negatively related to the firm’s marginal product of labor.
b. negatively related to the nominal wage the firm pays. d. all of the above.

10. In the model with sticky prices, in the short run a positive monetary shock leads to:
a. an increase in household real money balances. c. no change in household’s desired real money balances.
b. an increase in household’s demand for goods. d. all of the above.

11. In the model with sticky prices, in the short run a positive monetary shock leads to:
a. an increase in household real money balances. c. an increase in house hold’s desired real money balances.
b. a decrease in household’s demand for goods. d. all of the above.

12. In the model with sticky prices, in the short run a positive monetary shock leads to:
a. a decrease in household real money balances. c. a decrease in household’s desired real money balances.
b. an increase in household’s demand for goods. d. all of the above.

13. In the model with sticky prices, in the short run a positive monetary shock leads to:
a. a decrease in household real money balances. c. no change in household’s desired real money balances.
b. a decrease in household’s demand for goods. d. all of the above.

14. In a model with sticky prices, a positive monetary shock would cause households:
a. to spend more to try to get rid of the excess money. c. to change optimal real money balances.
b. to want to hold more money. d. all of the above.

15. In the model with sticky prices, in the short run a positive monetary shock leads to:
a. an increased supply of labor. c. a higher marginal product of labor.
b. an increased demand for labor. d. all of the above.

16. In the short run with a model with sticky prices a positive monetary surprise:
a. increases labor demand. c. increases the real wage.
b. increases real output. d. all of the above.

17. In the short run with a model with sticky prices a positive monetary surprise:
a. increases labor demand. c. leaves the real wage unchanged.
b. decreases real output. d. all of the above.

18. In the short run with a model with sticky prices a positive monetary surprise:
a. decreases labor demand. c. leaves the real wage unchanged.
b. increases real output. d. all of the above.

19. In the short run with a model with sticky prices a positive monetary surprise:
a. decreases labor demand. c. increases the real wage.
b. decreases real output. d. all of the above.

20. In the short run with a model with sticky prices a negative monetary surprise:
a. decreases labor demand. c. decreases the real wage.
b. decreases real output. d. all of the above.

21. In the short run with a model with sticky prices a negative monetary surprise:
a. decreases labor demand. c. increases the real wage.
b. increases real output. d. all of the above.

22. In the short run with a model with sticky prices a negative monetary surprise:
a. increases labor demand. c. increases the real wage.
b. decreases real output. d. all of the above.

23. In the short run with a model with sticky prices a negative monetary surprise:
a. increases labor demand. c. decreases the real wage.
b. increases real output. d. all of the above.

24. In the short run in a model with sticky prices:
a. the labor input is procyclical. c. the real wage rate in procyclical.
b. the average product of labor is countercyclical. d. all of the above.

25. In the short run in a model with sticky prices:
a. the labor input is procyclical. c. the real wage rate in countercyclical.
b. the average product of labor is procyclical. d. all of the above.

26. In the short run in a model with sticky prices:
a. the labor input is countercyclical. c. the real wage rate in countercyclical.
b. the average product of labor is countercyclical. d. all of the above.

27. In the short run in a model with sticky prices:
a. the labor input is countercyclical. c. the real wage rate in procyclical.
b. the average product of labor is procyclical. d. all of the above.

28. In the long run in a model with sticky prices:
a. prices will adjust. c. increase in prices reverse the short run effects.
b. money is neutral. d. all of the above.

29. In the long run in a model with sticky prices:
a. prices will adjust. c. the short run effects persist.
b. money still affects output. d. all of the above.

30. In the long run in a model with sticky prices:
a. prices remain sticky. c. the short run effects persist.
b. money is neutral. d. all of the above.

31. In the long run in a model with sticky prices:
a. prices remain sticky. c. increase in prices reverse the short run effects.
b. money affects production. d. all of the above.

32. In a new Keynesian model:
a. money is procyclical and money is weakly procyclical in the data. c. the average product of labor is countercyclical while the average product of labor is weakly procyclical in the data.
b. the price level is countercyclical and the price level is countercyclical in the data. d. all of the above.

33. In a new Keynesian model:
a. money is procyclical and money is weakly procyclical in the data. c. the average product of labor is procyclical while the average product of labor is countercyclical in the data.
b. the price level is procyclical and the price level is procyclical in the data. d. all of the above.

34. In a new Keynesian model:
a. money is countercyclical and money is weakly countercyclical in the data. c. the average product of labor is procyclical while the average product of labor is countercyclical in the data.
b. the price level is countercyclical and the price level is countercyclical in the data. d. all of the above.

35. In new Keynesian model:
a. money is countercyclical and money is weakly countercyclical in the data. c. the average product of labor is countercyclical while the average product of labor is weakly procyclical in the data.
b. the price level is procyclical and the price level is procyclical in the data. d. all of the above.

36. In a new Keynesian model an increase in aggregate demand causes:
a. an increase in real production greater than the increase in aggregate demand. c. an increase in real production less than the increase in aggregate demand.
b. an increase in real production equal to increase in aggregate demand. d. a decrease in real production.

37. In a new Keynesian model a temporary increase in output could be cause by:
a. a positive monetary surprise. c. a positive shock to government purchases.
b. households becoming exogenously more thrifty. d. all of the above.

38. In a new Keynesian model a temporary increase in output could be cause by:
a. a positive monetary surprise. c. a negative shock to government purchases.
b. households becoming exogenously less thrifty. d. all of the above.

39. In a new Keynesian model a temporary increase in output could be cause by:
a. a negative monetary surprise. c. a negative shock to government purchases.
b. households becoming exogenously more thrifty. d. all of the above.

40. In a new Keynesian model a temporary increase in output could be cause by:
a. a negative monetary surprise. c. a positive shock to government purchases.
b. households becoming exogenously less thrifty. d. all of the above.

41. In the short run in a new Keynesian model an increase in money means:
a. the price level must rise. c. the interest rate must rise.
b. real GDP must rise. d. all of the above.

42. In the short run in a new Keynesian model an increase in money means:
a. the price level must rise. c. the interest rate must fall.
b. real GDP must fall. d. all of the above.

43. Unlike the price misperception model the new Keynesian models finds that:
a. the price level is countercyclical as the data show. c. the price level is procyclical as the data show.
b. the price level is countercyclical while the data show it is procyclical. d. the price level is procyclical as the data show it is countercyclical.

44. In a model with sticky nominal wages an increase in the money supply will:
a. lower the real wage. c. increase the labor input.
b. increase real output. d. all of the above.

45. In a model with sticky nominal wages an increase in the money supply will:
a. lower the real wage. c. decrease the labor input.
b. decrease real output. d. all of the above.

46. In a model with sticky nominal wages an increase in the money supply will:
a. raise the real wage. c. decrease the labor input.
b. increase real output. d. all of the above.

47. In a model with sticky nominal wages an increase in the money supply will:
a. raise the real wage. c. increase the labor input.
b. decrease real output. d. all of the above.

48. A result of a model with sticky nominal wages is:
a. voluntary unemployment in the short run. c. money being countercyclical while in the data money is weakly procyclical.
b. a countercyclical real wage while in the data the real wage is procyclical. d. all of the above.

49. A result of a model with sticky nominal wages is:
a. involuntary unemployment in the short run. c. money being countercyclical while in the data money is weakly procyclical.
b. a procyclical real wage as in the data. d. all of the above.

50. A reason that nominal wages might be sticky is:
a. the government sets all wages. c. people having incomplete information about wages at other jobs.
b. contracts between workers and employers. d. all of the above.

51. The sticky-price model differs from the equilibrium business-cycle model in assuming that
a. nominal goods prices do not react to market changes quickly. c. real goods prices do not react to market changes quickly.
b. nominal goods prices react to market changes quickly. d. real goods prices react to market changes quickly.

52. The sticky-price model differs from the equilibrium business-cycle model in assuming that
a. the typical producer takes as given the price of his or her output. c. most goods are standardized and easily traded in organized markets.
b. the typical producer actively sets the price of his or her output. d. most goods are traded in perfectly-competitive markets.

53. The sticky-price model differs from the equilibrium business-cycle model in assuming that each producer
a. takes into account restaurant costs. c. takes into account menu costs.
b. assumes costs of price changes equal zero. d. assumes restaurant costs are greater than one.

54. A firm’s nominal marginal cost of production is
a. the ratio of the marginal product of labor to nominal wages. c. nominal wages minus the marginal product of labor.
b. nominal wages plus the marginal product of labor. d. the ratio of nominal wages to the marginal product of labor.

55. A firm’s nominal marginal cost of production is
a. the nominal cost of producing an additional unit of the good. c. equal to the marginal product of labor.
b. the real cost of producing an additional unit of the good. d. the same thing as a firm’s markup ratio.

56. Under imperfect competiton, each firm
a. has a nominal marginal cost equal to its output price. c. will set its price below its nominal marginal cost.
b. can set its price above its nominal marginal cost. d. none of the above.

57. If we observe in the market for automobiles that the auto price is above a firm’s nominal marginal cost, then
a. the firm is not maximizing profits. c. the market has imperfect competiton.
b. the firm is not accounting for restaurant costs. d. the firm takes as given its output price.

58. In the short-run in a sticky-price model, an increase in money shifts the
a. supply curve for labor rightward. c. demand curve for labor leftward.
b. supply curve for labor leftward. d. demand curve for labor rightward.

59. In the short-run in a sticky-price model, a decrease in money shifts the
a. demand curve for labor leftward. c. supply curve for labor rightward.
b. supply curve for labor leftward. d. demand curve for labor rightward.

60. In the short-run in a sticky-price model, where the product’s price is fixed by assumption, an increase in demand for a firm’s product will lead to
a. a decrease in production. c. no change in production.
b. an increase in production. d. a decrease in firm profits.

61. Labor hoarding means that
a. workers are motivated to remain out of the labor market during a recession. c. employers are motivated to retain workers even during a recession.
b. workers are motivated to work additional hours during an expansion. d. workers are motivated to work fewer hours during an expansion.

62. Labor hoarding may occur because
a. firms face costs in hiring and firing workers. c. firms want to have labor available for the next economic upturn.
b. workers face costs in the decision to enter the labor force. d. both (a) and (c).

63. The new Keynesian model may exhibit a multiplier effect, which implies that
a. the rise in output may be greater than the initial expansion in aggregate demand. c. the rise in labor supply may be greater than the initial expansion in aggreagate demand.
b. the rise in output will be lower than the initial expansion in aggregate demand. d. the rise in labor supply will be lower than the initial expansion in aggreagate demand.

64. In the new Keynesian model, an increase in household consumption will
a. increase saving. c. increase output by less than the increase in consumption.
b. increase output by more than the increase in consumption. d. not affect output.

65. The Federal Funds rate is
a. the 10-year nominal interest rate in the Federal Funds market. c. the overnight nominal interest rate in the Federal Funds market.
b. the 10-year real interest rate in the Federal Funds market. d. the overnight nominal interest rate in the Eurodollar market.

66. The Federal Funds rate applies
a. mostly to 30-year home mortgages. c. to the Eurodollar market.
b. mostly to the IMF (International Monetary Fund). d. to the inter-bank market.

67. A shortcoming of a constant-growth-rate rule for money is that
a. the Fed must have advance knowledge about future quantities of real money demanded. c. households may not understand how the Fed funds rate affects them.
b. the Fed must have an accurate measure of currency. d. it does not allow the nominal interest rate to respond to variations in the real quantity of money demanded.

SHORT ANSWER

1. What are sticky prices and when might prices be sticky?

2. In a model of price setting what determines firm j’s price?

3. What are the effects of a positive monetary surprise in the short run a model with sticky prices?

4. What are the long run effects of a monetary surprise in a model with sticky prices?

5. What are the effects of a monetary surprise in a model with sticky nominal wages?

6. When would a constant-growth rate rule for money work well, and when would it be difficult to use?

7. In the Keynesian model with sticky nominal wages, what is the short-run impact from a monetary expansion?

ECO 302 Week 11 Quiz

Chapter 17

TRUE/FALSE

1. With an international sector real GNP is consumption plus gross investment plus government purchases plus net real asset income from abroad.

2. The balance of trade is net exports or imports less exports.

3. A higher current account deficit is caused by a declining domestic economy.

4. The real current account balance is real national saving less net domestic investment.

5. Tariffs and quotas lead to a higher real GDP growth rate in the country imposing them.

6. The law of one price says that there must be a unique price for a good in each location where it is sold.

7. If the home country has a real GNP which is greater than real domestic expenditure, then the home country has a current-account deficit.

8. Foreign direct investment occurs when the home country acquires additional ownership of capital located in the rest of the world.

9. If the home country has negative trade balance, then its real GDP is less than real domestic expenditure.

10. The equilibrium business-cycle model predicts that the real current-account balance will be countercyclical.

MULTIPLE CHOICE

1. The law of one price:
a. prohibits price discrimination. c. is a tax on imports.
b. is that markets work to ensure that the same good has the same price in all locations. d. prohibits price increases unless firms can show their are unusual circumstances.

2. The difference between real GDP in a closed economy and real GNP in a open economy is:
a. net real asset income from abroad. c. net international investment position.
b. net imports. d. the trade balance.

3. Real GNP in an open economy is:
a. the closed economy real output less net real asset income from abroad. c. the closed economy real output less gross real asset income from abroad.
b. the closed economy real output plus gross real asset income from abroad. d. the closed economy real output plus net real asset income from abroad.

4. Net real asset income from abroad is:
a. rt-1•Bft-1/P. c. (Bft – Bft-1)/P.
b. Yt – (Ct +It +Gt ). d. ((Bft – Bft-1)/P) – (rt-1•Bft-1/P).

5. Net real foreign investment is:
a. rt-1•Bft-1/P. c. (Bft – Bft-1)/P.
b. Yt – (Ct +It +Gt ). d. ((Bft – Bft-1)/P) – (rt-1•Bft-1/P).

6. The trade balance is:
a. rt-1•Bft-1/P. c. (Bft – Bft-1)/P.
b. Yt – (Ct +It +Gt ). d. ((Bft – Bft-1)/P) – (rt-1•Bft-1/P).

7. The balance on the current account:
a. rt-1•Bft-1/P. c. (rt-1•Bft-1/P) + ((Bft – Bft-1)/P).
b. Yt + (rt-1•Bft-1/P) – (Ct +It +Gt ). d. ((Bft – Bft-1)/P) – (rt-1•Bft-1/P).

8. The balance on the current account is:
a. real GNP less net foreign investment income. c. real GNP less the net international investment position.
b. real GNP less net foreign investment. d. real GNP less real domestic expenditure.

9. The real current-account balance is:
a. net real asset income from abroad less trade balance c. trade balance times the net real asset income from abroad.
b. trade balance plus the net real asset income from abroad. d. trade balance less the net real income from abroad.

10. The real current account balance equals:
a. net foreign investments. c. the trade balance plus net real asset income from abroad.
b. real GNP less real domestic expenditure. d. all of the above.

11. The real current account balance equals:
a. net foreign investments. c. the trade balance.
b. the net international investment position. d. all of the above.

12. The real current account balance equals:
a. the trade balance. c. the net international investment position.
b. real GNP less real domestic expenditure. d. all of the above.

13. The real current account balance equals
a. the net international investment position. c. the trade balance plus net real asset income from abroad.
b. the trade balance. d. all of the above.

14. The trade balance is:
a. the difference between exports and imports. c. the real current-account balance less net real asset income from abroad.
b. real GDP less real domestic expenditure. d. all of the above.

15. The trade balance is:
a. the difference between exports and imports. c. net foreign investment.
b. real asset income from abroad. d. all of the above.

16. The trade balance is:
a. the balance on the current account. c. net foreign investment.
b. real GDP less real domestic expenditure. d. all of the above.

17. The trade balance is:
a. net foreign investment. c. the real current-account balance less net real asset income from abroad.
b. the net international investment position. d. all of the above.

18. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a. an increase in the MPK. c. an increase in borrowing from foreigners.
b. an increase in home country gross domestic investment. d. all of the above.

19. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a. an increase in the MPK. c. an increase in lending to foreigners.
b. an decrease in home country gross domestic investment. d. all of the above.

20. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a. an decrease in the MPK. c. an increase in lending to foreigners.
b. an increase in home country gross domestic investment. d. all of the above.

21. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a. a decrease in the MPK. c. an increase in borrowing from foreigners.
b. a decrease in gross domestic investment. d. all of the above.

22. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a. a larger current account deficit. c. a lower MPK.
b. a smaller current account deficit. d. lower domestic gross investment.

23. In the market clearing model with world markets for goods and credit, a decrease in technology, A, in the home country causes:
a. a larger current account deficit. c. a higher MPK.
b. a smaller current account deficit. d. higher domestic gross investment.

24. The open economy equilibrium business-cycle model predicts that the real current account balance will be:
a. acyclical. c. countercyclical.
b. procyclical. d. exogenous.

25. The open economy equilibrium business-cycle model predicts that the real current account balance will be:
a. the same in expansions and recession. c. high in expansions and low in recessions.
b. low in expansions and high in recessions. d. invariant with the business cycle.

26. In US data the real current account balance is:
a. procyclical when the model predicts it will be countercyclical. c. countercyclical when the model predicts it will be procyclical.
b. procyclical as the model predicts. d. countercyclical as the model predicts.

27. In US data the real current account balance is:
a. procyclical. c. countercyclical.
b. weakly procyclical. d. weakly countercyclical.

28. While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a. a temporary negative shock like a harvest failure. c. a temporary increase in government purchases as in war time.
b. a less developed country having a low capital stock. d. all of the above.

29. While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a. a temporary negative shock like a harvest failure. c. a permanent decrease in government purchases.
b. a less developed country having poor institutions for growth. d. all of the above.

30. While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a. a temporary positive shock like a good harvest. c. a permanent decrease in government purchases.
b. a less developed country having a low capital stock. d. all of the above.

31. While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a. a temporary positive shock like a positive harvest c. a temporary increase in government purchases as in war time.
b. a less developed country having a high capital stock. d. all of the above.

32. In the Ricardian case, if the government budget deficit is increased, then the trade balance:
a. moves toward a deficit too. c. is unaffected.
b. moves toward a surplus. d. is exogenous.

33. The terms of trade are:
a. ($ per home good)/($ per foreign good). c. foreign good per home good.
b. the number of units of foreign goods that can be imported for each unit of home goods exported. d. all of the above.

34. The terms of trade are:
a. ($ per home good)/($ per foreign good). c. home good per foreign good.
b. the number of units of home goods that can be exported for each unit of foreign goods imported. d. all of the above.

35. The terms of trade are:
a. ($ per foreign good)/($ per home good). c. home good per foreign good.
b. the number of units of foreign goods that can be imported for each unit of home goods exported. d. all of the above.

36. The terms of trade are:
a. ($ per home foreign/($ per home good). c. foreign good per home good.
b. the number of units of home goods that can be exported for each unit of foreign goods imported. d. all of the above.

37. An increase in the terms of trade:
a. raises real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.
b. increases consumption. d. all of the above.

38. An increase in the terms of trade:
a. raises real GDP. c. lowers real national saving.
b. decreases consumption. d. all of the above.

39. An increase in the terms of trade:
a. reduces real GDP. c. lowers real national saving.
b. increases consumption. d. all of the above.

40. An increase in the terms of trade:
a. reduces real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.
b. decreases consumption. d. all of the above.

41. A decrease in the terms of trade:
a. reduces real GDP. c. decreases real national saving if the change in terms of trade is less than fully permanent.
b. decreases consumption. d. all of the above.

42. A decrease in the terms of trade:
a. reduces real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.
b. increases consumption. d. all of the above.

43. If the government reduces tariffs or quotas on imports, then:
a. real GDP will increase. c. net domestic investment will rise.
b. the real current account balance falls. d. all of the above.

44. If the government reduces tariffs or quotas on imports, then:
a. real GDP will increase. c. net domestic investment will fall.
b. the real current account balance rises. d. all of the above.

45. If the government reduces tariffs or quotas on imports, then:
a. real GDP will decrease. c. net domestic investment will fall.
b. the real current account balance falls. d. all of the above.

46. If the government reduces tariffs or quotas on imports, then:
a. real GDP will decrease. c. net domestic investment will rise.
b. the real current account balance rises. d. all of the above.

47. If the government imposes or increases tariffs or quotas on imports, then:
a. real GDP will decrease. c. net domestic investment will fall.
b. the real current account balance rises. d. all of the above.

48. If the government imposes or increases tariffs or quotas on imports, then:
a. real GDP will decrease. c. net domestic investment will rise.
b. the real current account balance falls. d. all of the above.

49. If the government imposes or increases tariffs or quotas on imports, then:
a. real GDP will increase. c. net domestic investment will rise.
b. the real current account balance rises. d. all of the above.

50. If the government reduces tariffs or quotas on imports, then:
a. real GDP will increase. c. net domestic investment will fall.
b. the real current account balance falls. d. all of the above.

51. If we observe that the price of a good is higher in one location than in another location, this observation
a. violates the law of one price. c. violates the law of one GDP.
b. validates the law of one price. d. validates the law of one GDP.

52. Foreign direct investment is
a. the home country’s additional supply of labor to the rest of the world. c. the home country’s additional demand for labor from the rest of the world.
b. the home country’s additional ownership of capital in the rest of the world. d. the foreign country’s additional demand for labor in the home country.

53. When the home country acquires additional ownership of capital located in the rest of the world, it has is
a. reduced foreign indirect investment. c. acquired foreign direct investment.
b. acquired foreign divested investment. d. reduced foreign direct intervention.

54. Real gross national product in an open economy includes
a. real GDP. c. net real labor costs from abroad.
b. net real asset income from abroad. d. (a) and (b).

55. If the home country has a real GNP which is greater than real domestic expenditure, then the home country has
a. a current-account suplus. c. balance on the current account.
b. a current-account deficit. d. none of the above.

56. If the home country has a real GNP which is less than real domestic expenditure, then the home country has
a. a current-account suplus. c. balance on the current account.
b. a current-account deficit. d. none of the above.

57. If the home country has a real GNP which is equal to real domestic expenditure, then the home country has
a. a current-account suplus. c. balance on the current account.
b. a current-account deficit. d. none of the above.

58. If the home country has a real GNP which is greater than net foreign investment, then the home country has
a. a current-account suplus. c. balance on the current account.
b. a current-account deficit. d. none of the above.

59. If the home country has a real GDP which is greater than real domestic expenditure, then the home country has
a. a trade balance that is positive. c. a trade balance that is zero.
b. a trade balance that is negative. d. none of the above.

60. If the home country has a real GDP which is less than real domestic expenditure, then the home country has
a. a trade balance that is positive. c. a trade balance that is zero.
b. a trade balance that is negative. d. none of the above.

61. Historical data on the U.S. current account balance show
a. a deficit from the turn of the twentieth century through the mid-1970s. c. a surplus for the twentieth century through the mid-1970s.
b. a surplus in most of the past two decades. d. a zero current account balance for most of the twentieth century.

62. Historical data on the U.S. current account balance show that one of the largest ratios for the current-account balance relative to GDP occurred
a. as a surplus, in the early 1970s. c. as a surplus, in the early 2000s.
b. as a deficit, in the early 1990s. d. as a deficit, in the early 2000s.

63. Historical data on the ratio of U.S. nominal exports and imports to GDP show
a. a generally rising ratio since 1950. c. a generally positive but steady ratio since 1950.
b. a generally falling ratio since 1950. d. a ratio hovering around zero since 1950.

64. Historical data on the ratio of U.S. net international investment to GDP show
a. a steady increase in the ratio since 1980. c. a steady ratio since 1980.
b. a steady decline in the ratio since 1980. d. no discernable pattern in the ratio since 1980.

65. Historical data on the ratio of U.S. net factor income from abroad to GDP show
a. a steady increase in the ratio since 1980. c. a peak in the ratio around 1980, followed by a decline through 1987.
b. a steady decline in the ratio since 1960. d. no discernable pattern in the ratio since 1980.

66. A developing country with good prospects means that the country’s current-account balance would likely be
a. negative. c. zero.
b. positive. d. impossible to determine.

SHORT ANSWER

1. What is the real current account balance?

2. What are the effects of a permanent increase in technology in the open market clearing model?

3. What does the open market clearing model predict about the association of the real current account balance and real GDP growth and what do the data on the US show?

4. Does a government budget deficit lead to a real current-account deficit?

5. What are the effects of reducing tariffs and quotas in the open market clearing model?

Chapter 18

TRUE/FALSE

1. If the dollar per yen exchange rate rises, then so does the value of the dollar.

2. When absolute purchasing power parity holds, the real exchange rate is 1.

3. Relative purchasing power parity says that the country with the higher inflation rate will see its currency depreciate.

4. The interest rate differential between two countries is the real interest rate.

5. If a country fixes its exchange rate, it gives up control of its money supply.

6. The nominal exchange rate is measured by quantities of currencies exchanged, while the real exchange rate is measured by quantities of goods exchanged.

7. Fixed exchange rates are determined by market forces.

8. Flexible exchange rates are determined by market forces.

9. Poorer countries tend to have high real exchange rates because the prices for nontradable goods is low in these countries.

10. The combination of interest rate parity and relative purchasing power parity implies that expected real incomes are the same in the home country and the foreign country.

MULTIPLE CHOICE

1. The nominal exchange rate is:
a. foreign good per home good. c. the number of units of foreign currency per one unit of the home currency.
b. the number of units of foreign currency per one unit of home currency divided by the ratio of the foreign price level to the home price level. d. all of the above.

2. The real exchange rate is:
a. foreign good per home good. c. the number of units of foreign currency per one unit of the home currency.
b. nominal exchange rate divided by the ratio of the foreign price level to the home price level. d. all of the above.

3. Flexible exchange rates are determined by:
a. the market. c. the UN.
b. the home country government. d. the International Monetary Fund.

4. Fixed exchange rates are determined by:
a. the market. c. the UN.
b. the governments of the two countries. d. the International Monetary Fund.

5. Purchasing power parity is the idea that:
a. the nominal exchange equals the ratio of the foreign price to the home price. c. the nominal exchange equals the home price less the foreign price.
b. the nominal exchange rate equals the foreign price time the home price. d. the nominal exchange equals the home price less the foreign price.

6. Purchasing power parity may not hold due to:
a. inflation. c. market clearing.
b. nontraded goods such as services. d. all of the above.

7. Purchasing power parity may not hold due to:
a. inflation. c. shifts in the terms of trade.
b. market clearing. d. all of the above.

8. Absolutely purchasing power parity means:
a. the quantity of goods that can be bought in the home country equals the quantity of good that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the foreign price to the home price.
b. buying and selling goods looks equally attractive in both countries. d. all of the above.

9. Absolute purchasing power parity means:
a. the quantity of goods that can be bought in the home country equals the quantity of good that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the home price to the world price.
b. buying and selling goods looks more attractive in the home country. d. all of the above.

10. Absolute purchasing power parity means:
a. the quantity of goods that can be bought in the home country is greater than the quantity of goods that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the foreign price to the world price.
b. buying and selling goods looks equally attractive in both countries. d. all of the above.

11. Absolutely purchasing power parity means:
a. the quantity of goods that can be bought in the home country is greater than the quantity of goods that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the foreign price to the home price.
b. buying and selling goods looks more attractive in the home country. d. all of the above.

12. Non-traded goods include:
a. personal services like haircuts. c. consumer goods like shirts.
b. durable goods like tv sets. d. all of the above.

13. Non-traded goods include:
a. commodities like wheat. c. consumer goods like shirts.
b. real estate. d. all of the above.

14. Relative purchasing power parity says that:
a. the growth rate of the nominal exchange rate is the foreign inflation rate less the home inflation rate. c. the growth rate of the nominal exchange rate is the home inflation rate plus the foreign inflation rate.
b. the growth rate of the nominal exchange rate is the foreign inflation rate times the home inflation rate. d. the growth rate of the nominal exchange rate is the foreign inflation rate divided by the home inflation rate.

15. Relative purchasing power parity implies a country will see its currency fall in value, if
a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is higher than the foreign inflation rate.
b. its price level is higher than the foreign price level. d. its price level is lower than the foreign price level.

16. Relative purchasing power parity implies a country will see its currency rise in value, if
a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is higher than the foreign inflation rate.
b. its price level is higher than the foreign price level. d. its price level is lower than the foreign price level.

17. Relative purchasing power parity implies a country will see its currency keep the same value, if
a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is equal to the foreign inflation rate.
b. its price level is higher than the foreign price level. d. its price level is equal to the foreign price level.

18. If the home inflation rate is 5% and the foreign inflation rate is 9%, then by relative purchasing power parity the home country would expect is exchange rate to:
a. rise in value by 5%. c. rise value by 4%.
b. fall in value by 5%. d. fall in value by 4%.

19. If the home inflation rate is 9% and the foreign inflation rate is 5%, then by relative purchasing power parity the home country would expect is exchange rate to:
a. rise in value by 5%. c. rise value by 4%.
b. fall in value by 5%. d. fall in value by 4%.

20. If the home inflation rate is 5% and the foreign inflation rate is 5%, then by relative purchasing power parity the home country would expect is exchange rate to:
a. rise in value by 5%. c. have no change in its value.
b. fall in value by 5%. d. fall in value by 10%.

21. Interest rate parity says that:
a. the interest rate differential is the growth rate of the nominal exchange rate. c. the interest rate differential is the growth rate of the real exchange rate.
b. the interest rate differential is ratio of the foreign price level to the home price level. d. the interest rate differential is ratio of the home price level to the foreign price level.

22. If the home interest rate is 5% and the foreign interest rate is 7%, then the expected growth of the nominal exchange rate is:
a. 2%. c. -2%.
b. 5%. d. -12%.

23. If the home interest rate is 5% and the foreign interest rate is 7%, then the difference in the expected inflation rates is:
a. 2%. c. -2%.
b. 5%. d. -12%.

24. If the home interest rate is 7% and the foreign interest rate is 5%, then the expected growth of the nominal exchange rate is:
a. 2%. c. -2%.
b. 7%. d. -12%.

25. If the home interest rate is 7% and the foreign interest rate is 5%, then the difference in the expected inflation rates is:
a. 2%. c. -2%.
b. 7%. d. -12%.

26. If absolute purchasing power parity holds, under fixed exchange rates:
a. the home interest rate equals the foreign interest rate. c. the growth rate of the nominal exchange rate is zero.
b. the home inflation rate equals the foreign inflation rate. d. all of the above.

27. If absolute purchasing power parity holds, under fixed exchange rates:
a. the home interest rate equals the foreign interest rate. c. the growth rate of the nominal exchange rate is positive.
b. the home inflation is lower than the foreign inflation rate. d. all of the above.

28. If absolute purchasing power parity holds, under fixed exchange rates:
a. the home interest rate is higher than the foreign interest rate. c. the growth rate of the nominal exchange rate is negative.
b. the home inflation rate equals the foreign inflation rate. d. all of the above.

29. If absolute purchasing power parity holds, under fixed exchange rates:
a. the home interest rate is higher than the foreign interest rate. c. the growth rate of the nominal exchange rate is zero.
b. the home inflation rate is lower than the foreign inflation rate. d. all of the above.

30. If a country with a fixed exchange rate tries to raise its money stock it will:
a. see its central bank gain domestic government bonds. c. see its money stock fall back to its initial level.
b. see its central bank lose international reserves. d. all of the above.

31. If a country with a fixed exchange rate tries to raise its money stock it will:
a. see its central bank gain domestic government bonds. c. see its money stock continue to rise.
b. see its central bank gain international reserves. d. all of the above.

32. If a country with a fixed exchange rate tries to raise its money stock:
a. see its central bank lose domestic government bonds. c. see its money stock continue to rise.
b. see its central bank lose international reserves. d. all of the above.

33. If a country with a fixed exchange rate tries to raise its money stock:
a. see its central bank lose domestic government bonds. c. see its money stock fall back to its initial level.
b. see its central bank gain international reserves. d. all of the above.

34. A revaluation is when a country:
a. allows its currency’s value to float. c. lowers the fixed value of its currency.
b. raises the fixed value of its currency. d. allows its currency value to be set by the market.

35. A devaluation is when a country:
a. allows its currency’s value to float. c. lowers the fixed value of its currency.
b. raises the fixed value of its currency. d. allows its currency value to be set by the market.

36. A depreciation is when the value of a country’s currency:
a. is fixed by the government. c. falls in value in the exchange market.
b. rises in value in the exchange market. d. is fixed in relationship to gold.

37. An appreciation is when the value of a country’s currency:
a. is fixed by the government. c. falls in value in the exchange market.
b. rises in value in the exchange market. d. is fixed in relationship to gold.

38. Under a fixed exchange rate regime, losses of international reserves imply that:
a. the pressure on a country that needs to devalue it currency is greater. c. countries are not under much pressure to change the value of their currency.
b. the pressure on a country that needs to revalue its currency is greater. d. countries can not change the value of their currencies.

39. Fixed exchange rates:
a. facilitate transactions between countries compared to floating exchange rates. c. constrain monetary policy officials.
b. make monetary policy interdependent between the countries fixing their exchange rate. d. all of the above.

40. Fixed exchange rates:
a. facilitate transactions between countries compared to floating exchange rates. c. give domestic monetary policy officials more autonomy.
b. make monetary policy independent between the countries fixing their exchange rate. d. all of the above.

41. Fixed exchange rates:
a. make transactions between countries riskier compared to floating exchange rates. c. give domestic monetary policy officials more autonomy.
b. make monetary policy interdependent between the countries fixing their exchange rate. d. all of the above.

42. Fixed exchange rates:
a. make transactions between countries riskier compared to floating exchange rates. c. constrain monetary policy officials.
b. make monetary policy independent between the countries fixing their exchange rate. d. all of the above.

43. Floating exchange rates:
a. make transactions between countries more difficult. c. provide autonomy for monetary policy authorities.
b. make monetary policy independent. d. all of the above.

44. Floating exchange rates:
a. make transactions between countries more difficult. c. constrain monetary policy officials.
b. make monetary policy interdependent between the countries. d. all of the above.

45. Floating exchange rates:
a. make transactions between countries easier. c. constrain monetary policy officials.
b. make monetary policy independent. d. all of the above.

46. Floating exchange rates:
a. make transactions between countries easier. c. provide autonomy for monetary policy authorities.
b. make monetary policy interdependent between the countries. d. all of the above.

47. Under fixed exchange rates a country’s:
a. money supply is fixed. c. monetary policy makers are not independent.
b. inflation rate is fixed. d. all of the above.

48. Under fixed exchange rates a country’s:
a. money supply is fixed. c. monetary policy makers are independent.
b. inflation rate will rise. d. all of the above.

49. Under fixed exchange rates a country’s:
a. money supply is domestically controlled. c. monetary policy makers are independent.
b. inflation rate is fixed. d. all of the above.

50. Under fixed exchange rates a country’s:
a. money supply is domestically controlled. c. monetary policy makers are not independent.
b. inflation rate will rise. d. all of the above.

51. Suppose the exchange rate between the U.S. dollar and the Argentinian peso is 3 pesos per dollar today. It rises to 3.1 pesos per dollar the next day. This means the dollar has
a. appreciated and the peso has depreciated. c. appreciated, and the peso has appreciated.
b. depreciated and the peso has appreciated. d. depreciated, and the peso has depreciated.

52. In 1950, one U.S. dollar bought 361 Japanese yen, and in 2006, one U.S. dollar bought 117 yen. The U.S. dollar
a. gained over half of its value in terms of yen. c. appreciated relative to the yen.
b. lost over half of its value in terms of yen. d. appreciated relative to most of the world’s currencies.

53. If a country’s government intervenes often in the exchange rate market, then the country
a. is operating closer to a flexible exchange-rate model than a fixed exchange-rate model. c. is operating closer to a fixed exchange-rate model than a flexible exchange-rate model.
b. will experience repeated appreciations of its currency. d. is not a member of the International Monetary Fund (IMF).

54. At a simplified level, purchasing power parity makes sense because, if it did not, housefholds would
a. want to purchase all of their goods in one place, the more expensive country. c. not want to purchase any goods from either country.
b. want to purchase equal portions of their goods in each country. d. want to purchase all of their goods in one place, the cheaper country.

55. The real exchange rate is measured in units of
a. goods bought in the foreign country relative to goods bought in the home country. c. labor supply in the foreign country relative to labor supply in the home country.
b. prices in the foreign country relative to prices in the home country. d. none of the above.

56. If you can buy one pound of flour for $1.25 in the U.S. and one pound of flour for 0.75 £ (pounds) in the U.K., then purchasing power parity implies the
a. real exchange rate is 1.25 £ per $. c. nominal exchange rate is 1.67 £ per $.
b. nominal exchange rate is 0.6 £ per $. d. real exchange rate is 0.6 £ per $.

57. Purchasing power parity implies the
a. nominal exchange rate equals one. c. real exchange rate equals one.
b. nominal exchange is greater than one. d. real exchange rate is less than one.

58. The Balassa-Samuelson hypothesis identifies a pattern of poor countries having
a. low nominal exchange rates. c. low real exchange rates.
b. high nominal exchange rates. d. high real exchange rates.

59. The pattern of real exchange rates across countries that is identified by the Balassa-Samuelson hypothesis occurs because
a. low-income countries tend to have low prices for nontradable goods. c. low-income countries tend to have low prices for tradable goods.
b. low-income countries tend to have high prices for nontradable goods. d. low-income countries tend to have low real exchange rates.

60. The combination of interest-rate parity and relative purchasing power parity leads to the conclusion that the
a. foreign expected real interest rate is greater than the home expected real interest rate. c. foreign expected nominal interest rate equals the home expected real interest rate.
b. foreign expected real interest rate equals the home expected real interest rate. d. foreign expected nominal interest rate equals the home expected nominal interest rate.

61. The Bretton Woods System refers to
a. the flexible exchange-rate system that the International Monetary Fund (IMF) prefers. c. the fixed exchange-rate regime which linked other currencies to the dollar and the dollar to gold.
b. the flexible exchange-rate regime introduced just after World War II that gave France the major role in stabilizing currencies. d. the fixed exchange-rate regime which linked the U.S. and other currencies to silver.

62. Under the Bretton Woods System, the U.S. dollar
a. was allowed to vary around a wide band compared to other participating countries. c. was not fixed, but the U.S. nominal interest rate was fixed relative to other participating countries.
b. varied according to market conditions, but the other participating countries did not allow their currencies to vary. d. was the only participating currency linked directly to gold.

63. If the country of Colombia decides to fix its nominal exchange rate with the U.S. dollar, then in the long run, it will have
a. roughly the same inflation rate as the U.S. c. roughly the same real GDP as the U.S.
b. a higher inflation rate than the inflation rate for the U.S. d. a higher real GDP than the real GDP in the U.S.

64. One reason that a country with a record of high inflation might want to fix its nominal exchange rate with the U.S. dollar is that
a. the country will, in the long run, have about the same inflation rate as the U.S. c. the fixed exchange-rate will act as a monetary-policy rule which prevents the country from reneging on a pledge of low inflation.
b. the fixed exchange-rate will help the country gain credibility in fighting high inflation. d. all of the above.

65. In exchange rate policy, sterilization refers to
a. the market’s ability to clear excess quantities of currency supplied rapidly. c. anti-crime laws the U.S. passed to prevent “money laundering.”
b. the central bank’s attempt to offset an initial intervention in the exchange market. d. the process the International Monetary Fund (IMF) uses to lend to a country in need.

66. In a fixed exchange-rate regime, the money supply is
a. exogenous. c. endogenous.
b. interdependent. d. highly skewed.

SHORT ANSWER

1. What is a nominal exchange rate?

2. What is absolute purchasing power parity, what does it imply and why might it not hold?

3. What is relative purchasing power parity and when does it say the home country will see its currency lose value?

4. What is interest-rate parity and what does this imply about when the exchange rate will be stable?

5. What are the advantages of fixed and floating exchange rates?