ECON 3312 Macroeconomics Exam 4 Crowder Fall 2016 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) When the economy is hit by a temporary positive productivity shock, intertemporal decision theory predicts that the real interest rate will and current consumption for the representative agent will. A) fall; rise B) rise; rise C) not change; rise D) fall; fall 1) 2) An increase in real interest rates will current consumption and future consumption. A) decrease; increase B) increase; decrease C) decrease; have an unclear effect on D) have an unclear effect on; decrease 2) 3) When steady state capital per worker is above the golden-rule level, we know with certainty that an increase in the saving rate will A) decrease consumption in both the short run and the long run. B) increase consumption in both the short run and the long run. C) increase consumption in the short run, and decrease it in the long run. D) decrease consumption in the short run, and increase it in the long run. E) none of the above 3) 4) Temporary productivity shocks lead to an intertemporal effect in which real rates change as households smooth their consumption. A) substitution; interest B) income; wage C) substitution; wage D) income; exchange 4) 5) Assume that constant returns to scale describes the production technology and that N and K both increase by 2%. Given this information, we know that A) Y will increase by less than 2%. B) Y will increase by less than 4% and more than 2%. C) Y will increase by 2%. D) output (Y) will increase by 4%. 5) 6) The rational expectations hypothesis implies that when macroeconomic policy changes, A) the way expectations are formed will change. B) people will make systematic mistakes. C) people will be slow to catch on to the change. D) the economy will become highly unstable. 6) 7) According to real business cycle theory A) cash-in-advance is necessarily to explain business cycles. B) technology shocks play a major role in business cycles. C) Federal Reserve actions need to be watched closely. D) monetary policy is driving business cycles. 7) 1
8) Next periodʹs capital is equal to current-period investment A) plus the amount of current period depreciation. B) plus the amount of current capital left over after depreciation. C) minus the amount of current period depreciation. D) minus the amount of current capital left over after depreciation. 8) 9) When considering the cost of taking leisure in the current period which factors are relevant? A) the current real wage versus the future real wage. B) the degree to which any productivty change is permanent or temporary. C) the current marginal product of labor versus the future marginal product of labor. D) All of the above. E) None of the above. 9) 10) Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of in aggregate is a rise in both inflation and output in the short-run, but in the long-run the only effect is a rise in inflation. A) an increase; supply B) an increase; demand C) a decrease; supply D) a decrease; demand 10) 11) The New Keynesian transmission mechanism for monetary policy is characterized by A) helicopter drops of money. B) money having an impact on the real interest rate. C) banks using money injections for business loans. D) the government buying goods with fresh money. 11) 12) In the RBC model, actual real GDP is A) equal to the natural (potential) real GDP when P = Pe. B) never equal to the natural (potential) real GDP. C) always equal to the natural (potential) real GDP. D) equal to the natural (potential) real GDP when P is equal to or greater than Pe. 12) 13) Menu costs are A) the relative cost of raw materials compared to finished goods. B) the cost of changing prices. C) very small costs. D) the cost of differentiating prices for different goods. 13) 14) A classical objection to Keynesian sticky price models is that A) sticky price models are internally inconsistent. B) it is cheaper for firms to change output rather than change prices. C) real shocks are more important than nominal shocks. D) it is easier for firms to change prices rather than change output. 14) 15) Moving upward along the short-run aggregate supply curve, is equivalent to A) moving downward along the short-run Phillips curve. B) shifting the short-run Phillips curve rightward. C) shifting the short-run Phillips curve upward. D) moving upward along the short-run Phillips curve. E) shifting the short-run Phillips curve leftward. 15) 2
16) Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for an increase in government spending. This increase in government spending will, in the short run, cause an increase in A) the price level. B) the interest rate. C) the nominal wage. D) all of the above E) none of the above 16) 17) A rightward shift in the intertemporal budget line would be caused by. A) an increase in future income and a decrease in wealth. B) a decrease in future income and wealth. C) an increase in future income and wealth. D) a decrease in future income and an increase in wealth. 17) 18) When an economy is operating at the steady state, we know that A) steady state saving/investment equals consumption. B) steady state saving/investment exceeds depreciation each year by a constant amount. C) steady state saving/investment is less than total consumption. D) steady state saving/investment is equal to depreciation per worker. E) none of the above 18) 19) The intertemporal budget constraint tells us that A) consumption smoothing only occurs in years when income is greater than consumption. B) the income earned in a lifetime will be evenly divided between consumption and saving. C) household consumption is based on permanent income and not transitory income. D) the present value of lifetime consumption equals the present value of lifetime income. 19) 20) The short-run Phillips curve is another way of looking at A) potential GDP. B) the natural rate of unemployment. C) the short-run aggregate supply. D) Okunʹs law as applied to aggregate demand. E) aggregate demand. 20) 21) Human wealth is A) the discounted present value of all financial assets. B) total wealth minus housing wealth. C) financial wealth minus housing wealth. D) the sum of financial and housing wealth. E) the present discounted value of expected future after-tax labor income. 21) 22) For this question, assume that a country experiences a permanent increase in its saving rate. Which of the following will occur as a result of this increase in the saving rate? A) a permanently faster growth rate of output B) a permanently higher level of output per capita C) a permanently higher level of capital per worker D) all of the above E) both B and C. 22) 3
23) The assumption that current-period labor supply is positively related to the current-period real wage (i.e. the NS curve is upward sloping) is justified as long as the A) income effect dominates the substitution effect in the long run. B) income effect dominates the substitution effect in the short run. C) substitution effect dominates the income effect in the long run. D) substitution effect dominates the income effect in the short run. 23) 24) A consumer may increase her saving by A) working more hours and consuming fewer goods in the present period. B) working fewer hours and consuming more goods in the present period. C) working fewer hours and consuming fewer goods in the present period. D) working more hours and consuming more goods in the present period. 24) 25) Smoothing your consumption over time is best represented by. A) MU(Ct) = β MU(Ct+1) B) U(Ct) = U(Ct+1) 25) C) MU(lt) = β MU(lt+1) D) Ct = β Ct+1 26) When the aggregate demand curve shifts rightward, the price level and the unemployment rate. A) decreases; decreases B) increases; decreases C) decreases; increases D) does not change; does not change E) increases; increases 26) 27) In the New Keynesian model, as the nominal interest rate increases. A) the real interest rate increases B) the cost of current leisure rises C) the cost of current consumption rises D) all of the above E) none of the above 27) 28) The ʺGolden Ruleʺ steady state is characterized by A) minimum output lost to saving. B) maximum output per person. C) minimum depreciation of the capital stock. D) maximum consumption per person. 28) 29) Application of the time inconsistency problem to monetary policy suggests that, without some mechanism to ensure central bank commitment, the A) rate of inflation and the level of real output will be higher than they would be with commitment. B) rate of inflation will be higher than it would be with commitment. C) level of real output will be lower than it would be with commitment. D) rate of inflation will be higher and the level of real output will be lower than they would be with commitment. 29) 4
30) In response to a permanent increase in government spending, the permanent income hypothesis would suggest that, to a first approximation, consumption demand should A) fall exactly as much as the increase in government spending. B) fall by less than the increase in government spending. C) be unaffected. D) fall by more than the increase in government spending. 30) 31) If the expected inflation rate rises, then the short-run Phillips curve and the long-run Phillips curve. A) shifts; does not shift B) shifts; shifts C) might shift; shifts only if the short-run Phillips curve shifts D) does not shift; does not shift E) does not shift; shifts 31) 32) In the AD-AS model a change in workersʹ expectations about inflation will cause to change. A) short-run aggregate supply B) long-run aggregate supply C) the production function D) aggregate demand 32) 33) An important critique of real business cycle theory is the belief that cyclical movements in total factor productivity, i.e. the Solow residual A) are too small to account for the size of fluctuations in real GDP. B) lead to imperceptible changes in labor demand. C) may, in part, be an artifact of measurement error. D) rarely occur. 33) 34) Active stabilization policy by the central bank can be rationalized in the New Keynesian model because A) it allows a faster return to economic efficiency. B) the government knows best. C) it counteracts the influence of unions. D) it makes it possible to obtain zero inflation. 34) 35) Which of the following represents the change in the capital stock ( κ)? (Assume all in per capita) A) investment minus depreciation B) output minus depreciation C) investment minus saving D) consumption minus depreciation 35) 36) A price is sticky when A) it changes in discrete steps which may not balance markets. B) it tends to return to its steady-state level. C) it changes too much and does not balance markets. D) it does not change fast enough to restore full market equilibrium. 36) 5
37) An increase in lifetime wealth is likely to A) decrease current labor supply and increase current consumption demand. B) increase current labor supply and decrease current consumption demand. C) increase current labor supply and increase current consumption demand. D) decrease current labor supply and decrease current consumption demand. 37) 38) Robbie Cruz has a special offer from her boss, all widgets sold this week will result in double the normal commission per unit. What feature of intertemporal choice theory is the boss trying to exploit? A) substitution effect on consumption B) income effect on labor C) substitution effect on labor D) income effect on consumption 38) 39) When drawn against the current real wage, the labor demand curve is A) upward sloping because the marginal product of labor declines with the quantity of labor employed. B) upward sloping because the marginal product of labor rises with the quantity of labor employed. C) downward sloping because the marginal product of labor declines with the quantity of labor employed. D) downward sloping because the marginal product of labor rises with the quantity of labor employed. 39) 40) Assume that the central bank uses a New Keynesian model to guide its policy decisions. The current policy objective is to reduce inflation and inflation expectations in the economy with as little output loss as possible. Which of the following policy choices does their preferred model tell them has the best chance of meeting the policy objectives? A) Reduce the target rate of interest and announce that the loose monetray policy will last for a long time. B) Raise the target rate of interest without any forewarning to have the biggest impact. C) Raise the target rate of interest and announce that the tight monetray policy will last for a long time. D) None of the above. 40) 41) RBC theory leads to government macro-stabilization policy, due to the theoryʹs assumption of. A) a rationale for, slow wage and price adjustment B) a rejection of, slow wage and price adjustment C) a rejection of, continuous market-clearing D) a rationale for, continuous market-clearing 41) 42) The long-run aggregate supply curve shifts to the right when there is A) an increase in the total amount of capital in the economy. B) an increase in the available technology. C) a decrease in the natural rate of unemployment.. D) A and B. E) A, B, and C. 42) 6
43) According to the traditional interest-rate channel, expansionary monetary policy lowers the real interest rate, thereby raising expenditure on, but the New Keynesian model relies on the effect on consumption spending. A) consumption; intratemporal substitution B) saving; intertemporal wealth C) investment; intertemporal substitution D) investment; intratemporal substitution 43) 44) Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause in real GDP in the short run and in inflation in the short run, everything else held constant. A) a decrease; a decrease B) no change; a decrease C) an increase; an increase D) no change; an increase 44) 45) Rational expectations assumes that individuals A) have perfect foresight. B) form their predictions of macroeconomic variables randomly. C) use all available information up to MCinfo = MBinfo. D) can accurately predict the future. E) none of the above 45) 46) The output gap is A) the difference between initial output and final output. B) the difference between forecasted output and past output. C) the difference between target output and realized output. D) the difference between the potential output and actual output. 46) 47) The rate of output at which the price level has no tendency to rise or fall is called the A) efficient level of output. B) bliss point. C) potential level of income. D) natural rate of output. 47) 48) The phenomenon of underutilization of labor during a recession is called A) investing in human capital. B) labor force stabilization. C) labor hoarding. D) labor stockpiling. 48) 49) Moving along the short-run Phillips curve, a unemployment rate can only be achieved by paying the cost of. A) lower; a higher expected inflation rate B) lower; a lower inflation rate C) lower; a higher inflation rate D) higher; a higher inflation rate E) lower; a lower price level 49) 7
50) Behavioral economics has taught us that Homo economicus, i.e. the perfectly rational economic decision maker, does not exist in the real world. To what extent does this make the models we have discussed this semester, that generally rely on the assumption she exists, unreliable? A) Itʹs as serious as the Lucas critique. Garbage in, garbage out. B) We are so far off we need a whole new Macroeconomics. C) The current consensus model is flexible enough to incorporate new discoveries in human behavior. It makes no sense to jettison the whole thing. Just keep making marginal improvements over time. D) The true test of a model is itʹs ability to predict and help analyze real-world events, and the current Macro consensus does that pretty well. Stick with it until something is proven to be better. 50) 8
Answer Key Testname: ECON3312_EXAM4_FALL_2016 1) A 2) A 3) A 4) A 5) C 6) A 7) B 8) B 9) D 10) B 11) B 12) C 13) B 14) D 15) D 16) D 17) C 18) D 19) D 20) C 21) E 22) E 23) D 24) A 25) A 26) B 27) D 28) D 29) B 30) A 31) A 32) A 33) C 34) A 35) A 36) D 37) A 38) C 39) C 40) C 41) C 42) E 43) C 44) A 45) C 46) D 47) D 48) C 9
Answer Key Testname: ECON3312_EXAM4_FALL_2016 49) C 50) A, B, C, D 10