ECON352: Final Exam

The Solow model demonstrates that
A) in the absence of productivity growth, economic growth will turn negative in the long run.
B) in the absence of productivity growth, economic growth will reach a steady state of zero per-capita growth in the long run.
C) productivity growth must exceed the rate of growth in the population to avoid a steady state in the long run.
D) productivity growth will inevitably decline due to diminishing marginal productivity.
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The Solow model demonstrates that
A) in the absence of productivity growth, economic growth will turn negative in the long run.
B) in the absence of productivity growth, economic growth will reach a steady state of zero per-capita growth in the long run.
C) productivity growth must exceed the rate of growth in the population to avoid a steady state in the long run.
D) productivity growth will inevitably decline due to diminishing marginal productivity.
in the absence of productivity growth, economic growth will reach a steady state of zero per capita growth in the long run
The Japanese real interest declines relative to the German real interest rate. german net exports ______ and the German exchange rate _______
a) decreases; falls
b) increases; rises
c) increase; falls
d) decrease; rises
net exports decreases
exchange rate rises
Because of automatic stabilizers, in recessions the government budget deficit ________, while in expansions the deficit ________.
a) falls; falls
b) falls; rises
c) rises; rises
d) decrease; rises
recessions: budget deficit rises
expansions: deficits falls
When the Fed increases the quantity of assets it owns, it is said to be engaging in
a) forward guidance
b) credit easing
c) maturity extension program
d) quantitative easing
quantitative easing
An economic variable that moves in the same direction as aggregate economic activity (up in expansions, down in contractions) is called
a) acyclical
b) procyclical
c) countercyclical
d) a leading variable
procyclical
An economic variable that moves in the opposite direction as aggregate economic activity (up in expansions, down in contractions) is called
a) acyclical
b) procyclical
c) countercyclical
d) a leading variable
countercyclical
Suppose there was a banking crisis. The money supply would shrink by the greatest amount if the public ____ their currency- deposit ratio and the banks _____ their reserve deposit ratio
a) decreased; decreased
b) increased; increased
c) decreased; increased
d) increased; decreased
increased;increased
empirical evidence shows that in the short run, purchasing power parity____ and in the long run purchasing power parity ____
a) does not hold; does not hold
b) holds; does not hold
c) does not hold; holds
d) holds; holds
does not holds: holds
Suppose the Swiss franc rises against the British pound but falls against the Japanese yen. What happens to the prices of goods imported into Switzerland?
a) british goods rise in price while japanese goods fall in price
b) both british and japanese goods fall in price
c) british goods fall in price while japanese goods rise in price
d) both british and japanese goods rise in price
british goods fall in price while japanse goods rise in price
when a government prints money to finance its expenditures, it is likely to cause
a) reduction in use of barter
b) unemployment
c) inflation
d) deflation
inflation
In "Dreaming with BRICs" by Goldman Sachs, economists Dominic Wilson and Roopa Purushothaman, which of the following statements is not true a) India could be larger than all but the US and China in 30 years B) these predictions are highly suspect because the model performance from 1960 to 2000 is very poor and counterfactual c) of the current G6(US, Japan, Germany, France, Italy, and UK) only the US and Japan may be among the six largest economics in US dollar terms in 2050 D) China could overtake Germany in the next 5 yearsthese predictions are highly suspect because the model performance from 1960 to 2000 is very poor and counterfactualAccording to the ricardian equivalence proposition, a government budget deficit created by a temporary tax cut a) does not affect expected future taxes b) does not affect desired national saving c) reduces desired investment spending d) increases the real interest ratedoes not affect desired national savingAn increase in expected inflation is likely to cause a) a decline in the demand for real balances b) no change in the demand for real balances only if the income elasticity of real monye demand is zero c) an increase in the demand for real balances d) no change in the demand for real balancesa decline in the demand for real balancesWhich of the following macroeconomic variables is countercyclical: a) consumption b) money growth c) unemployment d) real interest ratesunemploymentIncreases in the debt-GDP ratio are primarily caused by a) a high growth rate of GDP b) a high government deficit relative to GDP c) increases in government borrowing through bonds d) increases in interest ratesa high government deficit relative to GDPSeignorage is the revenue a government raises by A) taxation. B) printing money. C) borrowing money. D) charging fees for services.printing moneyconsumer spending is spending by _____ households on final goods and services produced _____ a) domestic; domestically and abroad b) domestic and foreign; domestically and abroad c) domestic and foreign; domestically d) domestic; domesticallydomestic; domestically and abroadA decline in the domestic real interest rate would cause a ________ in net exports and a ________ in the exchange rate. a) fall; fall b) rise; fall c) fall; rise d) rise; riserise; fallwhich of the following would be part of the nation's capital and financial account a) a payment to the philippine government for the use of military bases in their country b) one hundred shares of british petroleum stock purchased by an american c) a night club show seen by an american in mexico city d) a dividend from a british equity owned by an americana dividend from a british equity owned by an americanthe real exchange rate is a) price of one currency in terms of another b) the price of domestic goods relative to foreign goods c)the difference in interest rates between the two countries d) the quantity of gold that can be purchased by one unit of currencythe price of domestic goods relative to foreign goodsa small open economy increases investment demand. this causes the world real interest rate to ____ and the country's current account balance to _____ a) rise; fall b) rise; rise c) remain unchanged; rise d) remain unchanged; fallremain unchanged; fallSuppose a new law imposes a tax on all trades of bonds and stock. What is the likely effect on money demand? a) money demand declines first, then rises when inflation increases b) money demand rises c) the overall effect is ambiguous d) money demand declinesmoney demand risesA decrease in the average tax rate, with the marginal tax rate held constant, will a) not affect the amount of labor supplied at any real wage b) decrease the amount of labor supplied at any real wage c) increase the amount of labor supplied at any real wage if the average tax rate is above the marginal tax rate, but decrease the amount of labor supplied at any real wage if the average tax rate is below the marginal tax d) increase the amount of labor supplied at any real wagedecrease the amount of labor supplied at any real wagea big mac costs $5 in the US. in turkey its 3. which is true a) the turkey lira is 66.7% overvalued relative to the US dollar B) the turkey lira is 66.7% overvalued relative to the US dollar c) the turkey lira is 40% overvalued relative to the US dollar d) the turkey lira is 40% overvalued relative to the US dollarthe turkey lira is 40% overvalued relative to the US dollarIn goods market equilibrium in an open economy, a) the desired amount of exports must equal the desired amount of imports less the amount lent abroad b) the desired amount of national saving must equal the desired amount of domestic investment c) the desired amount of national saving must equal the desired amount of domestic investment plus the current account balance d) the desired amount of exports must equal the desired amount of importsthe desired amount of national saving must equal the desired amount of domestic investment plus the current account balance.if a japanese company sells 200 VCRS to a french company and uses the money to buy US government bonds, the japanese merchandise trade balance ____ and the Japanese capital and financial account balance a) rises; rises b) falls; falls c) rises; falls d) falls; risesrises; fallsthe three main categories of government outlays are a) net interest payments, government investment, and government consumption expenditures b) government purchases, transfer payments, and net interest payments c) net government subsidies, the government deficit, and government purchases d) government consumption expenditures, government investment, and transfer paymentsgovernment purchases, transfer payments, and net interest paymentsa sharp increase in stock prices makes people much wealthier. if the main effect of this increase wealth is felt on labor supply, what happens to current employment and the real wage rate a) employment would decrease and real wage would increase b) both employment and the real wage would decrease c) both employment and the real wage would increase d) employment would increase and the real wage would decreaseemployment would decrease and real wage would increaseIn "Dreaming with BRICs" by Goldman Sachs, economists Dominic Wilson and Roopa Purushothaman, which of the following statements is true a) over the new few decades, the growth rates of the BRIC will be equal to those of the current G6 nations b) the predicted decline in the Japanese labor force may help Japan retain its current position as the 2nd largest economy in the world c) the predicted growth performance in the BRIC is mostly due to faster productivity growth rates and catching up with the current G6 counties d) by 2050, the incremental demand from the current G6 combined will equal that from the BRICthe predicted growth performance in the BRIC is mostly due to faster productivity growth rates and catching up with the current G6 countiesthe substitution effect of a decrease in real interest rates is to cause a consumer to a) increase current consumption and increase saving b) decrease future consumption and increase current consumption c) increase future consumption and decrease current consumption d) decrease current consumption and increase savingdecrease future consumption and increase current consumptionwhen the nominal exchange rate falls; a) the domestic currency buys fewer units of foreign currency and the domestic currency has appreciated b) the domestic currency buys more units of foreign currency and the domestic currency has appreciated c) the domestic currency buys fewer units of foreign currency and the domestic currency has depreciated d) the domestic currency buys more units of foreign currency and the domestic currency has depreciatedthe domestic currency buys fewer units of foreign currency and the domestic currency has depreciatedwhat are the commanding heights of the economy according to Lenin a) central bank, commerical bank, financial institutions b) steel, railroads, coal, heavy industries c) government firms households d) NBER, the fed(central bank), congresssteel, railroads, coal, heavy industriesfor the world as a whole over the last 200 years, the malthusians predictions a) have increasingly become a reality b) have been avoided because world population has not grown much c) have been averted by capital investments and technological advances d) have been averted primarily by new discoveries of natural resourceshave been averted by capital investments and technological advancesA Big Mac costs $5 in the US and in Demark 6. which of the following is true a) the danish krone is 16.7% overvalued relative to the US dollar B) the danish krone is 16.7% overvalued relative to the US dollar c) the danish krone is 20% overvalued relative to the US dollar d) thedanish krone is 20% overvalued relative to the US dollathe danish krone is 20% overvalued relative to the US dollarsuppose you read in the paper that the federal reserve plans to expand the money supply. the fed is most likely to do this by a) reducing its discount rate at the discount window b) reducing the required reserve ratio c) selling government bonds to the public d) purchasing government bonds from the publicpurchasing government bonds from the publicassume that an increase in costa rica government budge deficit reduced desired national saving by 10 million colon. assuming costa rice is a small, open economy, you expect the government action to a) increase the current account balance by less than 10 million colon b) reduce the current account balance by more than 10 million colon c) increase the current account balance by exactly 10 million colon d) reduce the current account balance by exactly 10 millionreduce the current account balance by exactly 10 millionA tremendous flood along the Mississippi River destroys thousands of factories, reducing the nation's capital stock by 5%. What happens to current employment and the real wage rate? a) employment would increase and real wage would decrease b) both employment and real wage would decrease c) both employment and the real wage would increase d) employment would decrease and the real wage would increaseboth employment and real wage would decreasewhy do people keep currency in their pockets when bank deposits pay interest a) bank deposits lose value due to changes in interest rates b) banks might steal your money c) banks deposits lose value due to inflation d) currency is more liquidcurrency is more liquidfor a borrower, an increase in the real interest rate will lead to a) higher current consumption and less borrowing b) lower current consumption and less borrowing c) higher current consumption and less saving d) lower current consumption and less savinglower current consumption and less borrowingwhich of the following macroeconomic variables is procyclical and leads the business cycle a) unemployment b) nominal interest rates c) business fixed investment d) residential investmentresidential investmentWhether real seignorage revenue increases when the rate of money growth increases depends on whether a) the rise in the real supply of currency outweighs the decline in inflation b) the rise in inflation outweighs the declines in real money holdings c) the rise in real money holdings outweighs the decline in inflation d) the rise in inflation ratio outweighs the decline in the real supply of currencythe rise in inflation outweighs the declines in real money holdingsa large open economy increases its desired savings. this causes the world interest to _____ and the country's current account balance to ___ a) remain unchanged; rise b) fall; rose c) fall; fall d) remain unchanged; fallfall; risezero lower bound refers to the fact that a) the lowest possible level of the current account deficit is zero in the long run b) the government budge deficit must be zero in the long run c) the inflation rate can never decline below zero d) nominal interest rates cannot fall below zeronominal interest rates cannot fall below zeroThe essential idea in Jared Diamond's book Guns, Germs, and Steel, is that some countries developed more rapidly than others and were able to expand and conquer much of the world because of geographic placement. Another theory suggests that some countries' financial markets developed faster and better (and helped fuel their growth) due their adoption of common law as opposed to civil law. A third theory places the causal effects of long run growth to the simultaneous development of economic and political institutions. Given that we covered all three theories and looked at empirical evidence related to the question of why nations differ in living standards, which of the following statements best summarizes our discussion? A) Geographic luck may explain some of the TFP differences across countries and therefore their living standards; a lot of the explanation is left to factors such as legal origins, and economic and political institutions. B) Geographic luck explains all of TFP differences across countries and therefore their living standards. C) Geographic luck explains most TFP differences across countries and therefore their living standards; little is left to factors such as legal origins, and economic and political institutions. D) Geographic luck explains none of the TFP differences across countries and therefore none of their living standards.Geographic luck may explain some of the TFP differences across countries and therefore their living standards; a lot of the explanation is left to factors such as legal origins, and economic and political institutions.As of December 2013, the ratio of total federal debt of the Unites States to its GDP was and publicly held debt to GDP ratio was _ . A) 100%; 73%. B) 73%; 100%. C) 10%; 73%. D) 73%; 10%.100% and 73%the desire to have an even pattern of consumption over time is known as A) excess sensitivity. B) the substitution effect. C) the consumption-smoothing motive. D) forced savingconsumption smoothingan increase in expected future output while holding today's output constant would A) increase today's desired consumption and increase desired national saving. B) increase today's desired consumption and decrease desired national saving. C) decrease today's desired consumption and increase desired national saving. D) decrease today's desired consumption and decrease desired national saving.increased today's desired consumption and decrease national savingstock market crashed, which would u expect to have largest true A) In response to the stock market crash the government reduced income taxes B) Most stocks were owned by insurance companies C) Most stocks were owned by foreign investment firms D) Many individuals had invested in the stock market immediately prior to the crashindividuals had invested in the stock market prior to crash (negative wealth effect that is economy wide)Desired national saving would increase unambiguously if there were A) an increase in both current output and expected future output. B) an increase in both expected future output and government purchases. C) an increase in both expected future output and the expected real interest rate. D) a fall in both government purchases and expected future output.fall in both government purchases and expected future outputan increase in the price of capital goods A) increase the expected future marginal product of capital B) reduce the expected future marginal product of capital C) increase the user cost of capital D) increase the interest cost but not affect the depreciation cost of capitalincreases the user cost of capitalwhen you are trying to figure out how much capital to add, you will increase capacity A) the future marginal product of capital is positive. B) the future marginal product of capital is greater than or equal to the present marginal product of capital. C) the future marginal product of capital is greater than the expected marginal product of labor. D) the future marginal product of capital is greater than the user cost of capital.as long as future marginal product of capital is greater than user cost of capitalThe desired level of the capital stock will increase if the A) user cost of capital increases. B) future marginal product of capital increases. C) effective tax rate increases. D) price of capital increases.future marginal product of capital increasesan increase in the expected real interest rate A) increase the desired capital stock. B) decrease the desired capital stock. C) have no effect on the desired capital stock. D) have the same effect on the desired capital stock as a decrease in corporate taxesdecreases the desired capital stockIf the rate of depreciation increases, then user cost ________ and the desired capital stock ________. A) falls; falls B) falls; rises C) rises; rises D) rises; fallsrises and fallsnet investmentgross investment minus depreciationexample of government purchasesspendingexample of government taxesincome or sales taxesan increase in current output A) shift the saving curve to the left. B) shift the investment demand curve to the left. C) not shift the curves. D) shift the saving curve to the right.D) shift saving curve to the rightthe saving investment diagram shows that higher real interest rate due to a leftward shift of the saving curvecauses total amounts of saving and investment to fallIn a closed economy, onerous regulations on businesses that take effect next year reduce businesses' expected future marginal product of capital. As a result, the real interest rate ________ and saving ________. A) falls; declines B) falls; increases C) rises; increases D) rises; declinesa) falls and declinesUse a saving—investment diagram to explain what happens to saving, investment, and the real interest rate in each of the following scenarios in a closed economy. (a) Current output rises due to a temporary productivity increase.Sd shifts to the right, increasing investment and decreasing real interest rateUse a saving—investment diagram to explain what happens to saving, investment, and the real interest rate in each of the following scenarios in a closed economy. (b) The tax code changes so that business firms face higher tax rates on their revenue (offset by other lump-sum tax changes so there's no overall change in government spending).Id is shift to the left. decreasing investment and and reducing real interest rateUse a saving—investment diagram to explain what happens to saving, investment, and the real interest rate in each of the following scenarios in a closed economy. (c) The average educational level rises, inducing an increase in the future marginal productivity of capitalId shifts to the right decreasing investment and reducing real irshifters of supplysupply chocks lower expectations of MPK higher taxesshifters of demandchange in tfp change in capital stockIn a closed economy, if consumers and firms believe that next year a recession will occur, then the real interest rate ________ and equilibrium saving __________. A) falls, unknown B) falls, increases C) rises, falls D) remains unchanged, unknownA) falls unknown when a recession is occurring it means 3 three things 1) lower future income 2) future of mpk is lower so this shifts both saving to the right and investment to the lefthow does an increase in g affect the saving curveshifts S ot the leftwhen. you have a positive net foreign assets are you a creditor or debitor>0 creditorwhen. you have a negative net foreign assets are you a creditor or debitordebitorwhen you have negative CA and KFA is positivedebitorwhen you have a positive CA and KFA is negativelendor, economy is lendingWhich of the following transactions is not included in the current account of the US? A) A consumer good is imported into the US. B) A US resident makes a deposit in a foreign bank. C) A foreign student pays tuition to a university in the US. D) A US resident receives income on his or her foreign assetsa) a us residents makes a deposit in a foreign bankif there ia trade decficirtimports exceed exportsCA balanceNX + NFI exports importants - increases in home country assets- service improtats income receipt-income paymentsWhich of the following statements is true? A country has a current account surplus if ... A) the value of its exports exceeds the value of its imports, while net income from foreign assets have a value of zero. B) the value of its net exports of services exceeds the value of its net exports of goods. C) it receives more income from foreign assets than it pays to foreigners for foreign owned domestic assets. D) its capital inflows exceed its capital outflows.a) value of exports exceeds the value of its imports while net income from foreign assets have a value of zeroIn a large open economy like the United States, an increased government budget deficit which reduces national saving should also A) reduce investment and increase the current account balance. B) reduce investment and reduce the current account balance. C) have no effect on investment, but reduce the current account bal D) have no effect on either investment or the current account balance.B) reduce investment and reduce current account balancenet exportsexports minus importsIn a goods market equilibrium in an open economy, A) the desired amount of exports equals the desired amount of imports. B) the desired amount of exports equals the desired amount of imports less the amount lent abroad. C) the desired amount of national saving equals the desired amount of domestic investment. D) the desired amount of national saving equals the desired amount of domestic investment plus the amount lent abroad.D) the desired amount of national saving equals the desired amount of domestic investment plus the amount lent abroad. Id = Sd+ FA if FA is negative, country is lending money abroadCA equationNX + NFICA + KFA= 0NXexports + service epxports - imports-service improtants NX is alos the trade baalnceNFIincome receipts from abroad - income payments from foreignsFAincrease in forieng assets - increase in home country assets abroad)Which of the following is not a potential benefit of globalization? A) lower consumer prices due to global competition B) higher specialization among countries allows higher global output due to comparative advantage C) countries' current accounts become smaller D) poor countries have a chance to catch up with the rich thanks to international tradecountries current accounts becoming smaller countries can increase of decrease their CA surpluses/defcifitsIf a small open economy has a current account balance of zero, a rise in the world real interest rate would lead to A) a current account surplus. B) a financial account surplus. C) net borrowing from abroada) current account surplus exrtra sabing would increase CA increase in world interest rates, saving increases4. If a small open economy has a current account balance of zero, a rise in its investment demand would cause A) a current account surplus. B) a financial account deficit. C) exports to exceed imports. D) net borrowing from abroad.shift in investment curve would lead to a CA deficit or equaivalently, net borrowing from abroad Fa surplus happen when a country inflow of assets is largerwhen a small open economy reduces desired saingcurrent account balance fallsIf there is an increase in the future marginal product of capital in a small open economy, it causes the current account to ________ and saving to ________. A) fall; rise B) rise; remain unchanged or fall C) fall; remain unchanged or falincrease in MPK will increase emand but may also increase futue income CA falls and savings falls or remiained unchangedCA= S-Iincreasing saving increase CA deceasing saving decreases saving if CA is 0 and they have a rise in demand, they will have to borrowConsider a small open economy in an equilibrium with a zero current account balance. What happens to national saving, investment, and the current account balance in equilibrium if (a) future income rises? (b) business taxes rise? (c) the future marginal product of capital rises?a) futue income rises, saving falls so Ca falls b) investments ffall so CA rises investment right so CA fallsIn a model with two large open economies, the world real interest rate is such that A) desired international lending by one country equals desired international borrowing by the other country. B) desired international lending will be the same in both countries. C) desired international borrowing will be the same in both countries. D) desired international lending and borrowing will be zero in both countriesA) desired international lending by one country equals desired international borrowing by the other country sd-id = Ifr - sfrIn a model with two large open economies, if desired international borrowing by the domestic country exceeds desired international lending by the foreign country, then A) domestic investment does not change. B) domestic investment must rise. C) the world real interest rate must fall. D) the world real interest rate must rise.D) world interest rate must rise if borrowing is higher than world saving real itnerest rates must increase to achieve equlibruumA large open economy increases its desired saving. This causes the world real interest rate to ________ and the country's current account balance to ________. A) fall; fall B) remain unchanged; rise C) fall; rise D) remain unchanged; fC) increases saving due to increase interest rate will increaas CA. In a two-economy model of the United States and another large economy made up of the rest of the world, if desired saving by the rest of the world declined A) U.S. current account would decrease. B) U.S. saving would decrease. C) the world real interest rate would increase. D) the world real interest rate would decrease.C) world interest rate would increase when a large LOE saivn decreases, world desired saving decreases so interest rate have to incrrease and ca will increaseA large country imposes capital controls that prohibit foreign borrowing and lending by domestic residents. The country is currently running a financial account surplus. The imposition of the capital controls will cause A) net exports to decrease. B) real domestic interest rates to rise. C) national investment to increase. D) national saving to fall. Iwhen FA>0 nxSuppose the development of the European Union leads to a greater demand for investment in Europe. You'd expect A) a recession in Europe. B) a decline in the world real interest rate. C) a rise in the current account in Europe. D) an increase in the world real interest rate.an increase in the world real interest rate eu is large part of cpitalmarkets(2) what is the relationship between the current account balance and the net foreign wealth of a country? what happens when CA is (+) or (-)the change in net foreign wealth is the current account balance CA<0 net foreign wealth of a country decreases CA>0 net foreign wealth of a country increases(2) What is the relation between saving and the current account? equation: what happens when S >I or when S<IS=I + CA S>1= CA is (+) C<1 = CA is (-)(2) What is the relation between government saving and the budget balancethey are the same government saving is the government's budget balance(2) What is government saving? what does it equal?the different between tax revues and government balances ^this difference is the government budget balance(2) What happens to national wealth is national saving is positive?the change in national wealth is equal to national saving so when national wealth is positive, national saving will increase(2) What is the GDP deflator?the nominal price of real GDP(2) How do we find real GDP?multiplying the new quantity by the base year price(2) What is the CPI?the cost of a fixed basket of consumption of goods? we keep quantity fixed but change price(2) What is the difference between GDP Deflator and CPI?GDP Deflator keeps price fixed but quantity changing (variable-weighted method) CPI keeps quantity fixed but price changing (fixed-basket method)(2) What is the relationship between GNP and GDP?GNP= GDP + NFP when GNP>GDP, NFP must be positive and vice versa(2) What is the relationship between Saving and GNPS=GNP-C-G(2) What is Current Accounts - definition -NX -NFPCA= NX + NFP NX: net exports (exports-imports) NFP: net factor payments - diff between exports and imports CA: are also in terms, foreign investments(2) What can National Saving be used for?Domestic Investment and Net Foreign Investment(2) What does a positive/negative current accountpositive: country is lending on net (invest more abroad than foreigners invest in the country) negative: country is borrowing (invest abroad less than foreigners invest in the country)(2) What can private saving be used for?domestic investment government budget deficit net foreign investment (current account)(2) What is the relationship between stock variables vs flow variablesstock variables are measured at a point in time - EX: quantity of money, wealth, value of houses flow variables are measured as per unit of time - EX: GDP, income, saving is flow and determines the change in wealth - flow variables are also the rate of changes of stock variables(2) What is National Wealth?the sum of domestic and foreign wealth(2) Change in National WealthNW(t+1)-NW(t)= S =I + CA I finds the change in domestic wealth CA finds the change in foreign wealth this is why the change in national wealth is equal to the saving(2) Change in Net Foreign WealthNW^F(t+1)-NW^(F)= CA(2) When is the relationship between interest rate and savingwhen interest rates are higher, there is a higher incentive to save(3) What are the main properties of a typical production functionproduction function is increasing in the input of production 1. more input leads to more output 2. diminishing marginal products of labor and capital 3. constant returns to scale(3) What is the marginal product of capital and labormpk is the amount of increase in output with one unit increase of capital mpl is the the increase in output with a one unit increase in labor eventually the more we increase of these, the amount of output increased will diminish(3) When you increase all production inputs by x%, how much will output changeby the same value of of x%(3) When is the production function displaying increasing, constant, or diminishing returns to scalediminishing is the exponents of L and K <1 constant if exponents of L and K =1 increasing i exponents of L and K >1(3) If A is constant then what happens to APL and PL and productivitythey all increase(3) What does the productive values of labor and capital (aka the marginal products depend on)total factor productivity(3) MPL at the given value of L isthe slope of the production function at that given value L(3) Capital input over timeK(t+1)-(rate of depreciation)* K(t)+ Investments(3) What happens to capital stock if I (investment) exceeds depreciationcapital stock will increase(3) How do we explain increases in average labor productivity ?comes from TFP increases and capital deepening(3) How do we find MPL, MR, MC, and MP1 10 2 19 3 27 MPL: difference in Y MPL: 10 (10-0) 9 (19-10) 8 (27-19) MR: MPL * Y1 10*10 = 100 9*10 = 90 8*10 = 80 MC: cost of each worker 75 MP: different between MR and cost of each worker 100-75=25 90-75=15 80-75=5(3) Growth Rates:gx= x(new)/x(old) ^(1/#of year) -1 the last year growth rate may be diff**(3) What is a critical determinant in strategic market entry?the strength of the local business conditions now and in the future(3) What does TFP tell usthe overall efficiency of the economy in using its inputs to produce GDP(3) Which has a bigger impact in the short run and the long run on economic performance: institutions or macroeconomic policiesinstitutions play more of a role in the long run (such as IPP, competition, incentives for innovation)(3) why do we heterogeneity in laborage, martial status, and health(3) TFP also representsthe quality of the institutions in the economy(3) What do we need to raise the wage rate?a high TFP and or capital-labor ratio aka capital deepening(4) Sources of Economic Growth TFPA/A(4) Source of Economic Growth K/Lcapital labor ratio(5) when given a production function, how to solve for S and I and next period capital stockS=sY where s is the saving rate next period capital stock is (1-S)Kt + 1(5) What happens to capital in steady state with constant TFP and population growthcapital is constant so I can be equal to K removing a depreciation rate(5) if rate of deprecation in the short-run, what happens to a) per-capita capital b) per capita output c) per-capita consumptionthey all increase starting next period(5) if rate of population growth decreases starting from the steady state, what happens in the short-run a) per-capita capital b) per capita output c) per-capita consumptionthey all increase starting in the short run(5) if saving rate s decreases, starting from ss, what happens in short-run a) per-capita capital b) per capita output c) per-capita consumptioncapital and output decrease consumption is ambiguous but will decline in the long run(5) if tfp decreases, starting from the ss, what happens a) per-capita capital b) per capita output c) per-capita consumptioncapital will decrease next period output and consumption decrease in the current period(5) if rate of depreciation decreases what happens in the lr a) per-capita capital b) per capita output c) per-capita consumptionno effect(5) if rate of population growth decreases what happens in the lr a) per-capita capital b) per capita output c) per-capita consumptionno change(5) if saving rate decreases, what happens in the lr a) per-capita capital b) per capita output c) per-capita consumptionno change(5) if level of tfp in the long run decreases what happens a) per-capita capital b) per capita output c) per-capita consumptionno change(5) if rate of population decreases, what happens a) aggregate capital b) aggregate output c) aggregate consumptionlong run will drop(5) if the rate of TFP growth decreases in the long run, what happens a) aggregate capital b) aggregate output c) aggregate consumptionall of these will drop(5) What does the Solow model tell uswithout productivity (TFP) growth, capital accumulation does not generate economic activity due to diminishing returns to capital(5) how can an economy remain in steady statereplaced the depreciated capital and equip the newly born workers with the same capital per worker that existing workers already have(5) what happens to steady state output per worker when saving rate risesthe saving curve is shifted up economy starts to grow so capital and output per worker increases is not an engine of growth in the long run(5) what happens to steady state output per worker when population growth risessteady state is lower faster growing workforce requires a larger amount of capital to be used acts as if capital is depreciating faster not an engine of growth in the long run(5) what happens to steady state output per worker when TFP risessaving curve shifts up so capital and output per worker increases no bound with how high tfp can go(5) to maintain a fast-growing economy what is neededa high investment rate(5) steady state capital output ratios/(deprecation + gy)(5) what does investment equaldepreciation of the capital stockPractice Midterm: Calculating GDPfinal goods + inventory - cost of intermediate goodsPractice Midterm: How to find the value of steady state capital and steady state consumption1. S5k0.5=(n+d)(k) .2(5)k^0.5 and then solve for k 2. plug k back into the 5k^0.5 3. take that answer and mutliple it by the (1-.2)(Y) to find the consumptionPractice Midterm: if total factor grew 0.025, capital grew 1.5%, and labor grew .015. how much did output growadd 0.025+0.015Practice Midterm: two main characteristics of the production functionslopes upward and slop becomes flatter due to decreasing marginal productivityPractice Midterm: the use of the saving identity says that if gov budget deficit rises thenprivate saving must rise, domestic investment must fall, and or the current account must fallPractice Midterm: what would decrease the steady state levela decrease in total factor productivityIf a country's working-age population declines and its wealth increases, then the labor supply curve a) shifts left b) shifts to the right c) shifts to the left if the effect of the change in wealth is bigger than the effect of the change in the working population d) shifts to the right if the effect of the change in wealth is bigger than the effect of the change in the working populationshifts leftJane earns $200 in her 1st period, $300 in her second period, and $100 in her 3rd and last period. She starts the 1st period and ends her 3rd period with zero assets and wishes to smooth consumption perfectly across these three periods. She faces borrowing constraints and cannot borrow at all even though the real interest rate is 0%. Her 2nd period saving is a) -100 b) 200 c) 0 d) 100d 100In a small open economy, S = 260 + 500r and I = 300 - 200r. If r = 0.1, then net exports = a) 30 b) -30 c) 50 d) -50260-500r-300-200r 30When there are two large open economies, if desired international borrowing by the domestic country is less than desired international lending by the foreign country, then the world real interest rate must fall. a) domestic investment must fall b) domestic investment must rise c) the world real interest rate must fall d) the world real interest rate must risethe world real interest must fallJane earns $200 in her 1st period, $300 in her second period, and $100 in her 3rd and last period. She starts the 1st period and ends her 3rd period with zero assets and wishes to smooth consumption perfectly across these three periods. She faces borrowing constraints and cannot borrow at all even though the real interest rate is 0%. Her 1st period saving is a) 0 b) 100 c) 200 d) -1000A large country imposes capital controls that prohibit foreign borrowing and lending by domestic residents. The country is currently running a financial account deficit. The imposition of the capital controls will cause ______. a) real domestic interest rates to rise b) net exports to increase c) desired national saving to fall d) real world interest rates to falldesired national saving to fallWhich of the following statements correctly describes the discussion on trade, automation and labor markets: a) Occupations that rely on routine tasks such as production work and back office admin jobs are more prone to automation and therefore job losses. b) the negative employment effects of trade are evenly distributed across different worker groups and locations c) the employment share of manufacturing shows a slight upward trend since the 1950, until 200 about the time that China became a manufacturing power house d) trade benefits only a small fraction of the population and primarily enriches large corporations e) more highly educated workers tend to suffer more from trade and automationOccupations that rely on routine tasks such as production work and back office admin jobs are more prone to automation and therefore job losses.The city of Hope has a labor force of 1000. Ten people lose their jobs each month and remain unemployed for exactly one month before finding jobs. On January 1, May 1, and September 1 of each year, 40 people lose their jobs for a period of four months before finding new jobs. What is the unemployment rate in any given month? a) 2% b) 7% c) 3% d) 5%10+40/1000 = 50Suppose output is $1000 billion, government purchases are $200 billion, desired consumption is $600 billion, and desired investment is $150 billion. Net foreign lending would be equal to ___. Y = C + I + G + CA1000 = 600+2000+150+NXFrictional unemployment arises when a) output and employment are below full employment levels b) labor must be rellaocated from industries to areas that are growing d) workers must search for suitable jobs and firms must search for suitable workers d) unskilled or low skilled workers find it difficult to obtain desirable long-term jobsworkers must search for suitable jobs and firms must search for suitable workersA sharp decrease in stock prices makes people much poorer. If the main effect of this decreased wealth is felt on labor supply, what happens to current employment and the real wage rate? a) employment would decrease and real wage would increase b) both employment and the real wage would decrease c) both employment and the real wage would increase d) employment would increase and the real wage would decreaseemployment increase and real wage decreasesThe government announces a tax decrease on workers' wages to take effect in the future. What happens to current employment and the real wage rate? a) both employment and real wage increase B) both decrease c) employment increases and real wage would decrease d) employment would decrease and real wage would increaseemployment would decrease and real wage would increasesuppose that the demand for labor is N=300-2w where N is he number of workers demanded and w is the real wage. the quantity of labor supplied is 100 + 3w. if the minimum wage of 50 is introduced in this labor marker, what is the loss a) 0 b) 10 c) 0 d) 2520 3w-3w 5w = 200 w - 40 N = 220 N - 200Which of the following is correct according to the arguments by Daron Acemoglu on artificial intelligence, automation and work? a) The countervailing forces are typically not sufficient to counter the powerful displacement effect of automation and new tasks are needed to keep employment to rise. b) the displacement effect refers to the creation of new tasks to counterbalance the job losses due to automation c) the countervailing forces (productivity, capital accumulation, and deepening of automation) have been more than sufficient in the past so there was no need to create new tasks to increase employment overall d) the introduction of ATM's as an example of automation led to a permanent reduction of bank tellers and a decline in the number of bank branches permanently e( the reinstatement effect refers to the reduction in the demand for labor and the decline in employment and wagesThe countervailing forces are typically not sufficient to counter the powerful displacement effect of automation and new tasks are needed to keep employment to rise.If there is an decrease in the future marginal product of capital in a small open economy, it causes the current account to ________ and saving to ________. A) fall; rise B) rise; remain unchanged or fall C) fall; remain unchanged or fallrise and remain unchangedwhen future labor income rises in a large open economy, it causes the CA to ___ and Investment to ____fall; fallIf the United States buys computers from Ukraine, and Ukraine uses the proceeds to buy shares of stock in Unites States companies, the U.S. trade balance falls (since this is an import) and the U.S. financial account balance rises since a) rises; fall b) falls; rises c) falls; falls d) rises; risestrade balance falls bc it is an import financial account rises since capital is coming inAccording to the Solow model, an increase in the capital-labor ratio will A) reduce steady-state consumption per worker if the capital-labor ratio is below the Golden rule capital stock. B) always reduce steady-state consumption per worker. C) always increase steady-state consumption per worker. D) increase steady-state consumption per worker if the capital-labor ratio is below the Golden rule capital stockincrease steady-state consumption per worker if the capital-labor ratio is below the Golden rule capital stockUse the information on the following transactions for a country named Happyland: i. Local bakery shop: Sold $7,000 worth of pastries to domestic consumers. Purchased flour to produce pastries from a foreign producer for $1,000 (imports). Paid wages to local workers for $5,000. Profits are $1,000. Bought a new oven for $3,000 from a foreign producer (imports). The oven will be used in the future to produce pastries. ii. Local toy manufacturers: Sold $5,000 of toys to domestic consumers and $3,000 to foreigners (exports). Bought $2,000 worth of components (plastic, screws, etc.) from a domestic company. Paid $4,500 in wages to domestic workers and $500 in wages to foreign workers for part-time jobs in Happyland. What is left is paid as profits. iii. Local company producing toy components: Sold $2,000 worth of components to domestic toy manufacturers. Paid $1,500 for wages to domestic workers. What is left is paid as profits. iv. Government: Raised $1,000 from residents in Happyland in taxes. Hired one domestic worker to produce public services to whom it paid $500 in wages. Notice that public services is production and contributes to GDP. What is the value of private domestic consumption expenditures A) $10,000 B) $15,000 C) $12,000 D) $13,000 E) $11,000 What is the value of GDP in Happyland? A) $14,500 B) $12,500 C) $13,500 D) $17,500 E) $15,500 What is the value of Net Factor Payments from abroad (NFP)? This is the difference between incomes received from foreign countries (earned in foreign countries by residents) minus the incomes paid to foreign countries (earned by non-residents in Happyland). A) $3,500 B) -$3,500 C) -$500 D) $500 E) $0xwages paid to foreign workers is 600 so NFP is 600 consumption is 700 of pastries + 4000 of toys to 11,000 GDP is the 11000+3000+500 + (3000 exports -3000 imports oven - 1000 for flour) so 13,500if k1 were to decrease what changes would allow that A) a decrease in the population growth rate B) an increase in the saving rate C) a decrease in total factor productivity D) a decrease in the rate of depreciationa decrease in total factor productivityWhat will happen to capital and output per-worker during the next few years?both cpaital and output per worker will riseIn our discussions of McKinsey Global Institute's long run economic growth article on outperformers, which of the following statements is correct about China's growth experience over the last few decades? A) Nearly all output growth was due to approximately equal contributions of capital growth and TFP growth. B) Nearly all output growth was due to approximately equal contributions of capital growth and labor growth. C) The biggest source of output growth, by far, was TFP growth. D) The biggest source of output growth, by far, was growth in the capital input. E) The biggest source of output growth, by far, was growth in the labor input.Nearly all output growth was due to approximately equal contributions of capital growth and TFP growthIn 2020, the current account deficit of Greece was about 6% of GDP. The net foreign asset position of Greece at the beginning of 2020 was about -170% of GDP. At the end of 2020, the net foreign asset position of Greece would be (as a percent of GDP): (The change in the net foreign asset position equals the current account balance.) A) -164 B) -176 C) 176 D) 164170% + 6% = 176%.Over the past year, total factor productivity (TFP) grew 0.015, capital grew 1.5%, and labor grew 0.015. If the elasticities of output with respect to capital and labor add to 1, how much did output grow? (The growth rate of output is the sum of i) the growth rate of TFP, ii) the product of capital's share of output and capital growth, and iii) the product of labor's share of output times labor growth.) A) 2% B) 3% C) 4% D) 5% E) 1%.015+.015 = .03By Marks buys a one-year German government bond (called a bund) for $200. He receives principal and interest totaling $210 one year later. During the year the CPI rose from 100 to 106, but he had thought the CPI would be at 104 by the end of the year. By Marks had expected the real interest rate to be ________, but it actually turned out to be ________. (Real interest rate equals the difference between the nominal interest rate and the inflation rate. Similarly, expected real interest rate is the difference between the nominal interest rate and expected inflation.) A) -1%; 1% B) -2%; 2% C) 2%;-2% D) 1%; -1%(Real interest rate equals the difference between the nominal interest rate and the inflation rate. Similarly, expected real interest rate is the difference between the nominal interest rate and expected inflation.) $212/$200 - 1 = 0.06 Nominal interest rate. Expected real interest rate = 0.06 - expected inflation = 0.06 - (106/100 - 1) = 0 Actual real interest rate = 0.06 - actual inflation = 0.06 - (104/100 - 1) = 0.02The uses-of-saving identity shows that if the government budget deficit rises, then one of the following must happen. (Private saving equals the sum of domestic investment, opposite of government or public saving, and, current account) A) Private saving must rise, domestic investment must rise, and/or the current account must fall. B) Private saving must rise, domestic investment must fall, and/or the current account must fall. C) Private saving must rise, domestic investment must fall, and/or the current account must rise. D) Private saving must fall, domestic nvestment must rise, and/or the current account must rise.Private saving must rise, domestic investment must fall, and/or the current account must fall.According to the article "Beyond GDP? Welfare Across Countries and Time" by Jones and Klenow (2016) that we discussed, which of the following statements is correct? A) The overall correlation between real GDP per person and the new welfare measure is very high (above 0.95); but there are some significant differences in how close major European and some developing countries are to the US based on their diferent levels of health, inequality, and leisure, but overall, real GDP per person is a very good indicator of living standards. B) The overall correlation between real GDP per person and the new welfare measure is fairly low (about 0.25); for example, major European countries are much closer to the US when we use welfare as a way to compare, as opposed to their relative position when using real GDP per person. C) The overall correlation between real GDP per person and the new welfare measure is very high (above 0.95); for example, major European countries are much lower ranked relative to the US when we use welfare as a way to compare their relative position as opposed to when using real GDP per person. D) The overall correlation between real GDP per person and the new welfare measure is fairly low (below 0.25), indicating significant problems with using real GDP per person as a measure of living standards when comparing different countries. E) Some of the developing countries such as Russia and sub-Sharan African countries rank closer to the US when we use welfare as a criterion (60% or higher); real GDP person measure would put these countries at a very small level (about 20%).E) Some of the developing countries such as Russia and sub-Sharan African countries rank closer to the US when we use welfare as a criterion (60% or higher); real GDP person measure would put these countries at a very small level (about 20%).Output per worker Y/L is given by A (K/L)a where A is total factor productivity (TFP), K/L is capital per worker, and a is capital's share of output. If there are two countries A and B such that output per worker in A is 2 times as large as that in B, then which of the following may be correct? A) The ratios of TFPs is equal to 1 and the ratios of K/L in the two countries is equal to 1 with a = 0.5. B) The ratios of TFPs is equal to 2 and the ratios of K/L in the two countries is equal to 4 with a = 0.5. C) The ratios of TFPs is equal to 4 and the ratios of K/L in the two countries is equal to 4 with a = 0.5. D) The ratios of TFPs is equal to 16 and the ratios of K/L in the two countries is equal to 1 with a = 0.5.The ratios of TFPs is equal to 1 and the ratios of K/L in the two countries is equal to 1 with a = 0.5.According to the Solow Model, which of the following statements is correct? A) A higher saving rate results in a lower long-run growth rate of output B) The long-run growth of per-capita consumption is not affected by the growth rate of technological progress (TFP) C) A lower depreciation rate has no effect on the long-run level of per-capita output D) A higher growth rate of population increases the long-run growth rate of total (aggregate) output E) A higher saving rate results in a higher long-run growth rate of outputhigher growth rate of population increases the long-run growth rate of total (aggregate) outputAssume that a certain country SpaCat satisfies all the assumptions of the Solow model (Cobb Douglas production function, constant saving rate, depreciation rate and population growth rate) and that the country is currently at a steady state capital per worker. Recently, a certain part of the population decided to separate and become an independent country called Cat. Assume that upon separation, the separators (new country Cat) will have 20% of the population and 15% of the capital stock that the unified country currently has. So, country Spa will end up with 80% of the population and 85% of the original capital stock. Both new countries have the same economic fundamentals (production function, saving rate, population growth rate and the depreciation rate). Then, in the long run (that is, at the steady state), A) In the long run, Spa will have a lower steady state capital per worker (and output per worker) than Cat. B) At the steady state (or in the long run), both countries will have the same steady state as the original country SpaCat. C) In the long run, Spa will have a higher steady state capital per worker (and output per worker) than Cat. D) In the long run, Spa and Cat will have the same steady state capital per worker but lower than that of the original country SpaCatAt the steady state (or in the long run), both countries will have the same steady state as the original country SpaCat.if already at k2 will this economy grow faster or slower than another eocnomy that is k*1 A) faster B) slower C) depends on the saving rates of the two economies D) just as fastslowerpercent change in velocity equationPrice + real income - stock of Mwhich variable is acylicalreal interestwhich variables have no timingpurchases, unemployment, real wageswhat effect does an increase in price level have on MDrise proportionallywhat effect does an increase in real income have on MDbut less thanwhat effect does an increase in real interest rate have on MDfallwhat effect does an increase in expected inflation have on MDfallwhat effect does an increase in nominal interest rate on nonmonetary assetsfallwhat effect does an increase in nominal ir on moneyhave on MDrisewhat effect does an increase in welath on moneyhave on MDrisealt assets