question

The experience of the U.S. economy during World War II confirms the prediction that a dramatic increase in government spending is likely to

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increase real GDP and decrease consumption.

question

An increase in government spending

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reduces consumption, increases hours worked, and reduces the real wage

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Changes in government spending are not likely causes of business cycles because government spending induced business cycles would predict

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countercyclical real wages. countercyclical consumption.

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An increase in total factor productivity

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increases consumption, increases output, and increases the real wage.

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Real business cycle theory argues that the primary cause of business cycles is fluctuations in

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TFP (z)

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Just prior to the four most recent U.S. recessions, there has been a

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significant increase in the relative price of energy.

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The variable G considered in the model encompasses

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government expenses on goods and services.

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An increase in government expenditures corresponding to 2% of GDP should, according to the model, increase GDP by

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between 0% and 2%.

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One drawback of the modeling of government expenses so far is that

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they are pure waste

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The Solow model emphasizes the role of which of the following factors of production?

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Capital (K)

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Before the Industrial Revolution, standards of living differed

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little over time and across countries

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Recent evidence suggests that output per worker is

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positively related to the rate of investment and negatively related to the rate of population growth.

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There is evidence that income per worker is converging in

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the richest countries, but not the poorest countries.

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A steady state is

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a long-run equilibrium.

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The Solow residual attempts to measure the amount of output notexplained by

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the direct contribution of labor and capital.

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Growth accounting, popularized by Robert Solow, attempts to attribute a change in aggregate output

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separately between changes in total factor productivity and changes in the supplies of factors of production.

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All of the following increase total factor productivity except: [new inventions, new management techniques, more capital, favorable changes in government regulations]

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more capital

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Which of the following increases total factor productivity? a) investment in machinery b) a harsh winter c) better access to credit d) new production procedures

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new production procedures

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Percentage deviations from trend in the Solow residual are

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procyclical and have about equal magnitude as percentage deviations from trend in GDP.

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The biggest contribution to real U.S. GDP growth in the 1970s was due to growth in

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both the capital stock and the labor force.

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The biggest contribution to real GDP growth in the "East Asian Tigers" during the period 1966-1991 was due to growth in

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Capital stock

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In the Solow growth model, the law of motion of capital takes into account

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the depreciation of old capital.

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The saving rate has the following characteristic in Solow's exogenous growth model

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it is constant.

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In Solow's exogenous growth model, the principal obstacle to continuous growth in output per capita is due to

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the declining marginal product of capital.

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Which of the following, if implemented in the Solow growth model, would not lead to a steady state?

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A constant marginal product of capital.

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In the steady state of Solow's exogenous growth model, an increase in the savings rate

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increases output per worker and increases capital per worker.

question

If the population growth rate increases by the same percentage points as the depreciation rate, what happens to the steady-state, per-worker output in Solow's exogenous growth model?

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it decreases

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In the steady state of Solow's exogenous growth model, an increase in total factor productivity

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increases output per worker and increases capital per worker.

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With an increase in total factor productivity in the Solow growth model,

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the economy reaches a steady state with higher output.

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If the population growth rate increases by 5% and the depreciation rate decreases by 5%, what happens to the steady-state, per-worker consumption in Solow's exogenous growth model?

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it does not change

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For the production function, Y = zK^(0.36)N^(0.64), if measured output is Y, measured capital input is K, and measured labor input is N, then the Solow residual would be equal to

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Y/(K^(0.36)*N^(0.64))

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Consumption smoothing refers to

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the tendency of consumers to seek a consumption path over time that is smoother than income.

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The simplest device to analyze dynamic decisions is a

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two-period model

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Savings in our model are

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postponed consumption

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A one-period bond is a promise to repay

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(1 + r) units of goods in the second period.

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The consumer's lifetime budget constraint states that

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the present value of lifetime consumption must be equal to the present value of lifetime disposable income.

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The endowment point is the consumption bundle in which

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consumption is equal to disposable income in each period.

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The endowment point is the consumption bundle in which

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no savings occur

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Why are there no savings in the household's lifetime budget constraint?

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savings are future consumption.

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For a lender in a (c1,c2) graph, the optimal consumption bundle is

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to the left of the endowment point.

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A consumer is a borrower if

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optimum current consumption is greater than current disposable income.

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Consumption demand is decreasing when the interest rate increases because

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savings become more attractive.

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For a competitive equilibrium in a two-period model, all of the following must be true except

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there must be an equal number of borrowers and lenders.

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The condition, MRSL,C = w, describes the representative consumer's

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current period work - leisure decision.

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The condition, MRSL2,C2 = w2, describes the representative consumer's

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future period work- leisure decision

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MRS C1, C2 is used to describe the representative consumer's

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consumption - savings decision.

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When drawn against the current wage, the current labor supply shifts to the right if

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current taxes increase.

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An increase in lifetime wealth is likely to

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decrease current labor supply and increase current consumption demand.

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Any increase in the present value of dividends for the consumer implies

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an increase in lifetime wealth and a decrease in current labor supply.

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The demand for current consumption, as plotted against current income, shifts to the right due to all of the following except

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an increase in current income.

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Next period's capital is equal to current-period investment

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plus the amount of current capital left over after depreciation.

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When drawn against the current real wage, the labor demand curve is

answer

downward sloping because the marginal product of labor declines with the quantity of labor employed.

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When drawn against the current real wage, the labor demand curve shift to the right if

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TFP (z) increases

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In determining the benefit of additional investment to the representative firm, we consider the marginal product of

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Future Capital (K')

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The marginal cost of investment for the firm is equal to

answer

1

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With d as the depreciation rate of capital and MPK' as the marginal product of capital next period, the marginal benefit from investment for a firm is equal to

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(MPK'+1-d)/(1+r)

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When drawn against the real interest rate, the optimal investment schedule shifts to the right if

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future total factor productivity (z') increases.

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When drawn against the real interest rate, the optimal investment schedule shifts to the right if the

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current capital stock (K) decreases.

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If the interest rate goes up, what happens to the investment demand curve?

answer

it stays put

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Output supply is increasing in the interest rate because

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labor supply is increasing in the interest rate.

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When drawn against the real interest rate, output supply increases if

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current total factor productivity (z) increases.

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When drawn against the real interest rate, output supply increases if

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current capital (K) increases.

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Without the cash-in-advance constraint, money would not be held by households in the intertemporal model with money because

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its return is too low

question

The cash-in-advance assumption means

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some goods require currency to be purchased.

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The current demand for money increases when

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current real income increases the rate of interest decreases

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The money supply is

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determined by policy.

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Money neutrality states that

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changes in money do not affect real aggregates.

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Money is neutral in the model economy we discussed because

answer

prices are fully flexible

question

In the intertemporal monetary model, the effects of a temporary decrease in total factor productivity include

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an increase in the real interest rate (r) and an increase in prices (p).

question

The cash-in-advance model with temporary total factor productivity shocks replicates which stylized fact?

answer

countercyclical prices

question

A price is sticky when

answer

it does not change fast enough to balance markets.

question

In the New Keynesian model,

answer

monetary policy has a real impact.

question

Why are aggregate demand shocks not a good explanation of business cycles in the New Keynesian model?

answer

Prices are not countercyclical.

question

What fundamental problem does the New Keynesian model have, when compared to the data?

answer

Prices do not fluctuate in the right way.

question

Active stabilization policy can be rationalized in the New Keynesian model because

answer

it allows a faster return to economic efficiency.

question

Under fiscal stabilization policy in the New Keynesian model, after a negative shock to output

answer

the government increases expenses and the central bank increases the money supply.

question

The basic real business cycle model has some difficulty explaining why

answer

the money supply is procyclical.

question

According to real business cycle theorists, an increase in total factor productivity could lead to an increase in the nominal money supply due to

answer

the Federal Reserve's attempts to stabilize the price level and the banking sector's expansion of deposit money.

question

M^d decreases with an increase in interest rates

answer

people are saving more

question

M^d increases with an increase in output

answer

HH want more cash goods

question

Money demand increases if

answer

decrease in interest rate (r) increase in real income

question

Changes in total factor productivity are plausible causes of business cycles because productivity-induced business cycles correctly predict

answer

real wages and consumption must be procyclical.

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