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Econ 313
Econ 313
196
Economics
Undergraduate 2
06/05/2016
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Term
Nominal GDP is a collection of:
 Definition
final goods and services
Term
Okun's law captures:
 Definition
changes in unemployment rate and GDP
Term
If MPC (marginal propensity to consume) is .75 and taxes decrease by 400,
 Definition
output increases by 1,600.
e.g.
400/(1-.75)
Term
The multiplier is smaller when
 Definition
there's a decrease in marginal propensity to consume (MPC)
Term
Increase in business confidence,
 Definition
expenditure goes up, increase in output
Term
When inventories have unintended decrease, firms will
 Definition
increase production, increase output
Term
The money demand curve shows
 Definition
relationship between quantity of money and interest rate. Is downward sloping.

Demand = (Price level)*(Output)/(Velocity of money)
Term
When interest rate increases
 Definition
opportunity cost of holding money goes up, less money is held
Term
People hold more money when nominal income increases which causes
 Definition
dollar value of transactions to go up
Term
Money demand curve shifts when
 Definition
income increases
Term
People hold money during price increases because
 Definition
it takes more money to buy the same amount of goods
Term
In the money demand-money supply model, an increase in money supply
 Definition
lowers interest rate
Term
In the money demand-money supply model, an increase in income
 Definition
increases the interest rate
Term
In the money demand-money supply model, a reduction in income
 Definition
increases bond prices and reduction in interest rate
Term
In the money demand-money supply model, an increase in price level
 Definition
increases the interest rate
Term
If the money market is out of equilibrium because demand is higher than supply
 Definition
people will sell financial assets to increase money holds, the price of financial assets will fall, and interest rate will increase to restore equilibrium
Term
Money supply equation
 Definition
M = (multiplier)(C + R)

C + R = high powered money
Term
High powered money equals
 Definition
C + R

Currency + Reserves
Term
A reduction in the reserve ratio will cause
 Definition
an increase in the money multiplier
Term
Assume C = 0, if the reserve ratio is 0.1,
 Definition
the simple money multiplier is 10
Term
When banks increase quantity of excess reserves, the money multiplier
 Definition
decreases
Term
Which would occur if central bank conducts an open market purchase of bonds
 Definition
an increase in the money supply
Term
Open market operations
 Definition
change the money supply by changing monetary base.

i.e. quantity of high powered money
Term
If the reserve ratio is 0.2, currency holdings are 0, the FED makes a $10,000 purchase of bonds, the money supply changes by
 Definition
$50,000

$10,000/0.2
Term
Which of the following occurs when central bank pursues expansionary monetary policy
 Definition
Central bank buys bonds, decreasing the interest rate
Term
When the federal open market committee meets, it sets
 Definition
target value for federal funds rate
Term
Which will cause an increase in the amount of money people want to hold?
 Definition
reduction of interest rate
Term
When income increases
 Definition
money demand curve shifts out
Term
A fall in the interest rate
 Definition
will increase bond prices
Term
At current interest rate, suppose the supply of money is less than the demand
 Definition
the price of bonds will fall
Term
Assume C = 0, if the reserve ratio is 0.4, the simple money multiplier is
 Definition
2.5 (1/.4) -> 1/R
Term
Money multiplier decreases when
 Definition
banks hold more excess reserves
Term
If reserve ratio if 0.25, C = 0, and the Fed makes a $5,000 purchase of bonds, the money supply
 Definition
increases by $20,000
Term
Investment is inversely related to interest rate when
 Definition
interest rate increases, expected profit goes down
Term
The IS curve
 Definition
illustrates the combinations of interest (i) and income (Y) that maintain equilibrium in the goods market
Term
IS curve is negatively sloped because
 Definition
decrease in interest rate means investment increase, driving output higher
Term
The expenditure multiplier is
 Definition
1/(1-MPC) or 1/MPS, assuming no taxes
Term
Government spending will
 Definition
shift the IS curve out
Term
Increase in taxes will
 Definition
shift the IS curve in
Term
Increase in autonomous consumption will
 Definition
shift IS curve out
Term
Increase in autonomous investment will
 Definition
shift IS curve out
Term
A fall in consumer confidence will
 Definition
move IS curve leftward
Term
Increase in business confidence will
 Definition
shift IS curve out
Term
If the MPC goes down
 Definition
multiplier falls, IS curve steeper
Term
An increase in responsiveness to interest rate changes reflects
 Definition
a flatter IS curve
Term
Investment spending is not sensitive to interest if
 Definition
the IS curve is relatively steep
Term
Which is not a component of the M1 definition of money
 Definition
savings accounts
Term
The LM curve shows
 Definition
sets of interest (i) and income (Y)that maintain equilibrium
Term
Intuition for positive slope of the LM curve is that
 Definition
income increases, money demand goes up causing the interest rate to increase
Term
The LM curve is
 Definition
d1/d2
Term
Slope of the LM curve is vertical when
 Definition
money demand does not depend on the interest rate
Term
When money supply goes up
 Definition
LM curve shifts out
Term
When the Fed purchases Treasury bills
 Definition
the LM curve shifts out
Term
An increase in price level
 Definition
shifts the LM curve in
Term
Suppose the economy operates on the LM curve but not the IS curve, this means that
 Definition
the money/bond market at equilibrium but the goods market is not
Term
In the IS-LM model, an increase in government spending
 Definition
increases income and the interest rate
Term
In the IS-LM model, an increase in taxes
 Definition
decreases income and decreases interest rate
Term
Equal and simultaneous reduction of G(government spending) and T (taxes) cause
 Definition
a reduction in output
Term
In the IS-LM model, an increase in business confidence
 Definition
increases income and increases interest rate
Term
In the IS-LM model, an increase in business confidence causes
 Definition
outward shift in the IS curve
Term
In the IS-LM model, an increase in consumer confidence
 Definition
increases income and increases interest rate
Term
In the IS-LM model, an increase in money supply
 Definition
increases output and decreases interest rate
Term
In the IS-LM model, a reduction in the aggregate price level causes
 Definition
outward shift in LM curve and reduction in interest rate
Term
If the government engages in simultaneous fiscal, monetary expansion, we know that
 Definition
output will increase
Term
If the Fed purchases bonds, with a simultaneous tax increase, there will be a
 Definition
reduction in i (interest rate)
Term
If the responsiveness of investment to the interest rate goes up,
 Definition
fiscal policy is less effective, monetary policy more effective
Term
The responsiveness of investment to the interest rate
 Definition
is larger near full employment and smaller in recessions
Term
Changes in the interest rate have a larger effect on investment when
 Definition
the economy is near full employment
Term
If the population is 5,000, number unemployed is 200, unemployment rate is 5%, the labor force participation rate is:
 Definition
80 percent

200/x = .05 -> 200/4,000 = .05 -> 4,000/5,000 = .8
Term
Which of the following represents the labor force participation rate
 Definition
the ratio of labor force to the civilian non-institutional population
Term
suppose the population is 200, number employed is 135, unemployment rate is 10 percent. The number unemployed is
 Definition
15
Term
Suppose the population is 1,000, number employed is 45, unemployment rate is 5 percent. Employment to population ratio is
 Definition
855/100
Term
Bargaining power of workers increases when
 Definition
unemployment compensation improves
Term
Efficiency wages are
 Definition
used by firms to increase productivity and decrease turnover
Term
Efficiency wage theory suggests
 Definition
productivity might drop if wages decrease
Term
In the wage setting equation,
 Definition
Wage = (Expected price level)(function(unemployment, other factors)

W = PeF(u,z)
Term
In the wage setting equation, z does not include which of the following
 Definition
extent to which firms mark up prices over marginal cost
Term
In the wage-setting equation, nominal wage tends to decrease when:
 Definition
unemployment benefits decrease
Term
In price setting equation, P=(1+m)W, m is
 Definition
markup over marginal cost due to monopoly power and is zero under pure competition
Term
An increase in m causes
 Definition
a downward shift in the PS curve
Term
In the WS-PS diagram, anything that increases z (bargaining power)
 Definition
shifts WS equation upward
Term
In the WS-PS diagram, anything that increases z (bargaining power)
 Definition
increase natural rate of unemployment and leaves real wage unchanged
Term
In WS-PS, a decrease in m (mark up over marginal cost due to monopoly power)
 Definition
shifts the PS equation upward
Term
In WS-PS, a decrease in m (mark up over marginal cost due to monopoly power) will cause
 Definition
decreases unemployment rate and raises real wage
Term
In WS-PS, a reduction in the mark up will cause
 Definition
increases the equilibrium real wage
Term
In WS-PS, an increase in the minimum wage will cause
 Definition
no change in the equilibrium real wage
Term
In WS-PS, a simultaneous decrease in markup and improvement in unemployment compensation causes
 Definition
increase in real wage and uncertain effect on unemployment
Term
Assume production function is Y = N and Pe = P, we know increased minimum wage will cause
 Definition
reduction in natural level of output
Term
Reservation wage refers to
 Definition
wage that makes workers indifferent between work and leisure
Term
Discouraged workers would
 Definition
take a job if offered, but gave up looking
Term
Natural level of output is the level of output that occurs when
 Definition
the economy operates at an unemployment rate consistent with WS and PS equation
Term
Suppose we wish to examine determinants of equilibrium wage and equilibrium level of employment (N). Real wage is on the vertical axis, level of employment is on the horizontal axis. WS relation will now be
 Definition
an upward sloping line
Term
In WS-PS, simultaneous increase in markup and decrease in unionization causes
 Definition
decrease in real wage and uncertain effect on unemployment
Term
Original Phillips curve based on British data was relation between
 Definition
wage growth and unemployment
Term
Now, Phillips curve based on US data to show the relation between
 Definition
inflation and unemployment
Term
Phillips curve derived from
 Definition
aggregate supply curve
Term
In the Phillips curve equation, increase in expected inflation increases actual inflation because
 Definition
wage earners demand higher wages, prices raise to cover that, inflation goes up
Term
In the Phillips curve equation, an increase in current inflation causes
 Definition
increase in wage bargaining power
Term
Prior to 1970s, it was reasonable to expect
 Definition
inflation would be 0
Term
Original Phillips curve with inflation and unemployment
 Definition
expected inflation was assumed 0
Term
Which of the following explains why the original Phillips curve ‘broke down’
 Definition
individuals changed the way they formed inflation expectations
Term
Assume individuals form expectations according to pi(t) = theta*pi(t-1). Value of theta was
 Definition
zero until 1970s, then increased steadily to one
Term
Assume that expected inflation is based on the following: pi(t) = theta*pi(t-1). If theta =1, we know
 Definition
there are low rates of unemployment. Will cause steadily increasing rates of inflation
Term
Suppose the Phillips curve is represented by: pi(t) - pi(t-1) = 20 - 2u(t). Given this, which is most likely to occur if actual unemployment = 6?
 Definition
Rate of inflation will tend to increase
Term
Assume expected rate of inflation equals last year’s inflations and unemployment rate has been greater than natural rate of unemployment. We know that
 Definition
rate of inflation should steadily decrease
Term
Which of the following will not cause an increase in natural rate of unemployment?
 Definition
Increase in expected rate of inflation
Term
Assume the phillips curve equation is represented by pi(t) - pi(t-1) = (m + z) - au(t). Given this, natural rate of unemployment will be
 Definition
(m + z)/a
Term
Assume the Phillips curve equation is represented by pi(t) - pi(t-1) = (m + z) - au(t). Which will cause reduction in natural unemployment rate?
 Definition
Increase in a
Term
Assume the phillips curve equation is represented by pi(t) - pi(t-1) = (m + z) - au(t). Which will cause an increase in natural rate of unemp?
 Definition
Increase in z
Term
Which of the following is not a reason for change in natural unemp rate over time?
 Definition
Changes in government spending
Term
Suppose the phillips curve is represented by: pi(t) - pi(t-1) = 15 - 3u(t). Given this, the natural unemp rate in this economy is
 Definition
5 percent
Term
In late 1970s, disagreement about costs of fighting inflation
 Definition
those who argued it would be costly were correct
Term
In late 1970s, those who argued it would not be costly argued
 Definition
inflation expectations would quickly adjust and rise in unemp would be small
Term
In late 1970s, those who argued it would be costly argued
 Definition
fed had lost credibility
Term
When a nominal wage is indexed, the nominal wage is usually automatically adjusted based on movements in
 Definition
changes in price level
Term
As proportion of labor contracts that index wages to prices decreases
 Definition
inflation would be less sensitive to changes in unemployment
Term
During great recession, Phillips curve broke down
 Definition
when inflation did not fall as much as predicted by nominal wage rigidity
Term
Reduction in unemployment rate causes
 Definition
increase in inflation over time
Term
The most often measure of changing living standards is
 Definition
growth rate of real GDP per capita
Term
Accurate comparison of living standards using data from US and Arabia
 Definition
purchasing power parity method
Term
Current exchange rate method to purchasing power parity method, India’s standard of living
 Definition
rises, but still far below US
Term
Main conclusion about growth for OECD countries and four rich countries
 Definition
large increase in standard of living since 1950
Term
Convergence occurring among OECD countries because
 Definition
poorer countries have higher growth rates than the richer ones
Term
Assume decreasing returns to capital, decreasing returns to labor, constant returns to scale. Labor and capital decrease by 5 percent.
 Definition
Output y decreases by 5 percent
Term
Assume constant returns to scale and n, k decrease by 3 percent, we know
 Definition
output decrease 3 percent
Term
If there are decreasing returns to scale, when capital and labor increase
 Definition
output less than doubles
Term
Assume decreasing returns to capital, decreasing returns to labor, constant returns to scale. Reduction in capital stock causes
 Definition
reduction in output
Term
Assume decreasing returns to capital, decreasing returns to labor, constant returns to scale. Reduction in labor will
 Definition
reduction in output
Term
Assume decreasing returns to capital, decreasing returns to labor, constant returns to scale. Successive and equal increases in capital per worker cause
 Definition
output per worker increase at constant rate
Term
Two sources of growth in standard of living
 Definition
improvement in technology and capital labor ratio
Term
Which must occur to sustain growth in standard of living in the long run
 Definition
Technological progress
Term
Purchasing power method is equivalent to
 Definition
using exchange rates
Term
Equation relating investment to capital stock
 Definition
Delta-K = sY - delta-K = sF(K,L) - delta-K

change in capital stock = investment - depreciation
Term
In growth model, saving rate is
 Definition
St = sYt
Term
At equilibrium in the growth model
 Definition
It = St
Term
Long run steady state equilibrium, where capital stock is constant, equilibrium reduces to
 Definition
Kt+1 - Kt = sf(Kt/N) - (symbol)(Kt/N)
Term
Long run steady state equilibrium, where capital stock is constant, equilibrium reduces to
 Definition
sf(Kt/N) = (symbol)(Kt/N)
Term
When capital stock per worker is below steady state
 Definition
capital/worker will rise because sf(Kt/N) > (symbol)(Kt/N) aka investment > depreciation
Term
If (Kt+1/N) > Kt/N, then
 Definition
saving per worker is greater than depreciation per worker in t
Term
When economy is at steady state
 Definition
saving is equal to depreciation
Term
When economy is at steady state
 Definition
growth of saving per worker is 0
Term
When economy is at steady state
 Definition
growth of investment per worker is 0
Term
When economy is at steady state
 Definition
growth of capital stock per worker is 0
Term
Level of output per worker in steady state will
 Definition
remain constant
Term
Increase in consumption per worker will unambiguously
 Definition
increase output per worker
Term
Reduction in saving rate will NOT affect which in long run?
 Definition
Growth rate of output per worker
Term
Decrease in saving rate will
 Definition
decrease temporarily growth of output per worker
Term
Increase in saving rate will cause
 Definition
temporary increase in the rate of growth output per capita
Term
Country A has lower depreciation rate than B, we know that
 Definition
growth rate same in both
Term
Country A has lower depreciation rate than B, we know that
 Definition
steady state consumption in A is lower than B
Term
If saving rate is 1 (s = 1), we know that
 Definition
C/N = 0
Term
Golden rule” tells us
 Definition
the saving rate that maximizes consumption
Term
In most countries
 Definition
saving rate is below rate given by the golden rule
Term
When consumption below the golden rule level
 Definition
increase in saving rate lowers consumption today, increases in future
Term
When steady state capital per worker is above golden rule level, increase in saving rate will
 Definition
decrease consumption in short and long run
Term
When saving rate is above golden rule level, increase in saving rate causes
 Definition
reduction in consumption per worker in long run
Term

True or false?

 

Human capital does not affect standard of living in long run

 Definition
False
Term
Increase in human capital per worker
 Definition
will increase steady state consumption per worker
Term
Saving rate in country A is greater than country B
 Definition
output per capita greater in B
Term
in a Steady state: increase in depreciation
 Definition
increases in K/N
Term
Which of the following represents a dimension of technological progress
 Definition
Larger quantities of output for given quantities of labor and capital, larger variety of products, new and/or better products
Term
In the following production function, Y = f(K, NA), an increase in A represents
 Definition
an increase in effective labor
Term
In the following production function, Y = f(K, NA), suppose A increases by 20 percent, this implies that
 Definition
the same output can be produced with 20 percent less labor
Term
In the following production function, Y = f(K, NA), for a given state of technology, constant returns to scale implies that output will increase by 7 percent when
 Definition
K and N increase by 7 percent
Term
Suppose the production function is written as Y/AN = f(K/AN). Then equal and successive increases in K/AN will cause
 Definition
smaller and smaller increases in output
Term
In the growth model allowing for technological change in chapter 12, the equilibrium condition is
 Definition
I/AN = sf(K/AN), where I/AN = (smalldelta + gA + gN)K/AN
Term
The equilibrium condition for the growth model allowing for technological change says that
 Definition
savings per effective worker equals the amount of investment that is needed to keep capital stock per effective worker constant
Term
At equilibrium in the growth model with technological progress, the growth rate of output equals
 Definition
(gA + gN), the population growth rate plus the growth rate of technological progress
Term
At equilibrium in the growth model with technological progress, the growth rate of output per worker, i.e. the growth in standard of living is
 Definition
gA, the growth rate of technological progress
Term
Which of the following will cause an increase in output per effective worker?
 Definition
An increase in the saving rate
Term
Which of the following will cause an increase in output per effective worker?
 Definition
A decrease in population growth
Term
Which of the following will cause an increase in output per effective worker?
 Definition
A decrease in the rate of depreciation
Term
Which of the following will cause an increase in output per effective worker?
 Definition
A decrease in the rate of technological progress
Term
Which of the following will cause a reduction in the steady-state growth rate of output per worker?
 Definition
A decrease in the rate of technological progress
Term
Assume: rate of depreciation is 10 percent per year, population growth rate is 2 percent per year, growth rate of technology is 3 percent per year. What is the annual growth rate of “effective labor” in the steady state in this economy?
 Definition
5 percent
Term
Assume: rate of depreciation is 10 percent per year, population growth rate is 2 percent per year, growth rate of technology is 3 percent per year. What is the level of investment needed to maintain constant capital per effective worker in this country?
 Definition
.15K
Term
Assume: rate of depreciation is 10 percent per year, population growth rate is 2 percent per year, growth rate of technology is 3 percent per year. What is the steady state growth rate of output?
 Definition
5 percent
Term
Assume: rate of depreciation is 10 percent per year, population growth rate is 2 percent per year, growth rate of technology is 3 percent per year. What is the steady state growth rate of output per worker?
 Definition
3 percent
Term
Which of the following is true after an economy reaches a balanced growth equilibrium?
 Definition
Growth rate of capital is equal to the growth rate of the effective work force
Term
Suppose output per worker has grown at the same rate as technology over many years, this country’s growth can be described as
 Definition
“balanced growth”
Term
Which of the following is constant when balanced growth is achieved?
 Definition
Y/NA
Term
Which of the following is NOT constant when balanced growth is achieved?
 Definition
NA
Term
Once the economy has achieved balanced growth, the capital stock is
 Definition
growing at a rate of gA + gN
Term
Once the economy has achieved balanced growth, output is
 Definition
growing at a rate of gA + gN
Term
Once the economy has achieved balanced growth, output per effective worker is
 Definition
growing at a rate of 0
Term
Once the economy has achieved balanced growth, output per worker is
 Definition
growing at a rate of gA
Term
High growth in rich countries from 1950 to 2009 was most likely due to
 Definition
technological progress
Term
Once the economy has achieved balanced growth, the growth rate of K/NA is
 Definition
0
Term
Which of the following represents the appropriability of research?
 Definition
The extent to which firms benefit from the results of their own R&D spending
Term
Which of the following represents the fertility of research?
 Definition
How R&D spending translates into new ideas (and new products)
Term
Patent protection is important for technological progress because it makes R&D
 Definition
more appropriable
Term
Two ways countries with low standards of living can catch up to countries with higher ones are
 Definition
improving technology and accumulating capital
Term
Assume: rate of depreciation is 5 percent per year, population growth rate is 4 percent per year, growth rate of technology is 2 percent per year. What is the steady state growth rate of output?
 Definition
6 percent
Term
Assume: rate of depreciation is 5 percent per year, population growth rate is 4 percent per year, growth rate of technology is 2 percent per year. What is the steady state growth rate of output per worker?
 Definition
2 percent
Term
Assume: rate of depreciation is 5 percent per year, population growth rate is 4 percent per year, growth rate of technology is 2 percent per year. What is the steady state growth rate of effective labor is
 Definition
6 percent
Term
Once the economy has achieved balanced growth
 Definition
S/AN = (smalldelta + gA + gN)K/AN
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