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1. Assume that two countries both have the per-worker production function y =
k1/2, neither has population growth or technological progress, depreciation is
5 percent of capital in both countries, and country A saves 10 percent of
output whereas country B saves 20 percent. If A starts out with a capitallabour ratio of 4 and B starts out with a capital-labour ratio of 2, in the long
run:
A) both A and B will have capital-labour ratios of 4.
B) both A and B will have capital-labour ratios of 16.
C) A's capital-labour ratio will be 4 whereas B's will be 16.
D) A's capital-labour ratio will be 16 whereas B's will be 4.
2. If y = k1/2, there is no population growth or technological progress, 5 percent
of capital depreciates each year, and a country saves 20 percent of output
each year, then the steady-state level of capital per worker is:
A) 2.
B) 4.
C) 8.
D) 16.
3. In the Solow growth model of Chapter 7, where s is the saving rate, y is
output per worker, and i is investment per worker, consumption per worker
(c) equals:
A) sy.
B) (1 s)y.
C) (1 + s)y.
D) (1 s)y i.
4. The formula for the steady-state ratio of capital to labour (k*), with no
population growth or technological change, is s:
A) divided by the depreciation rate.
B) multiplied by the depreciation rate.
C) divided by the product of f(k*) and the depreciation rate.
D) multiplied by f(k*) divided by the depreciation rate.
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5. Assume that a war reduces a country's labour force but does not directly
affect its capital stock. If the economy was in a steady state before the war
and the saving rate does not change after the war, then, over time, capital
per worker will ______ and output per worker will grow ______ than it did
before the war.
A) decline; faster
B) increase; faster
C) decline; more slowly
D) increase; more slowly
6. The production function y = f(k) means:
A) labour is not a factor of production.
B) output per worker is a function of labour productivity.
C) output per worker is a function of capital per worker.
D) the production function exhibits increasing returns to scale.
7. In an economy with population growth at rate n, the change in capital stock
per worker is given by the equation:
A) k = sf(k) + k.
B) k = sf(k) k.
C) k = sf(k) + (+ n)k.
D) k = sf(k) ( + n)k.
8. (Exhibit: Steady-State Capital-Labour Ratio) In this graph, the capital-labour
ratio that represents the steady-state capital-labour ratio is:
A) k0.
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B) k1.
C) k2.
D) k3.
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12. The benefits of the computer revolution had a lagged impact on productivity
growth because:
A) it took time for firms to figure out the best use of computer technology.
B) the government restricted which new computer technologies could be
implemented.
C) it was difficult to overcome the inertia generated by the large initial size
of the computer industry.
D) military computer applications took precedence over commercial
applications.
13. If the production function is Y = AK2/3L1/3 in the land of Solovia, and the
labour force increases by 5 percent while capital is constant, labour
productivity will:
A) increase by 3.33 percent.
B) increase by 1.67 percent.
C) decrease by 1.67 percent.
D) decrease by 3.33 percent.
14. In a steady-state economy with population growth n and labour-augmenting
technological progress g, persistent increases in standard of living are
possible because the:
A) capital stock grows faster than does the labour force.
B) capital stock grows faster than does the number of effective workers.
C) capital stock grows faster than does depreciation.
D) saving rate constantly increases.
15. In the Solow growth model, technological change is ______, whereas in
endogenous growth theories, technological change is ______.
A) assumed; explained
B) explained; assumed
C) persistent; constant
D) constant; persistent
16. In a steady state with population growth and technological progress:
A) the real rental price of capital is constant, and the real wage grows at
the rate of technological progress.
B) the real rental price of capital grows at the rate of technological
progress, and the real wage is constant.
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C) both the real rental price of capital and the real wage grow at the rate of
technological progress.
D) both the real rental price of capital and the real wage are constant.
17. In the Solow model with technological progress, the steady-state growth rate
of output per effective worker is:
A) 0.
B) g.
C) n.
D) n + g.
18. The number of effective workers takes into account the number of workers
and the:
A) amount of capital available to each worker.
B) rate of growth of the number of workers.
C) efficiency of each worker.
D) saving rate of each worker.
19. Other things being equal, all of the following government policies are likely
to increase national saving except:
A) decreasing taxes on savings accounts.
B) running a budget deficit.
C) running a budget surplus.
D) retiring part of the national debt.
20. If the short-run aggregate supply curve is horizontal, an increase in union
aggressiveness that pushes wages and prices up will result in ______ prices
and ______ output in the short run.
A) higher; lower
B) lower; higher
C) higher; higher
D) lower; lower
21. Short-run fluctuations in output and employment are called:
A) sectoral shifts.
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22. (Exhibit: Supply Shock) In this graph, assume that the economy starts at
point A and there is a favourable supply shock that does not last forever. In
this situation, point ______ represents short-run equilibrium and point ______
represents long-run equilibrium.
A) B; C
B) B; A
C) E; D
D) E; A
23. Long-run growth in real GDP is determined primarily by ______, while shortrun movements in real GDP are associated with ______.
A) variations in labour-market utilization; technological progress
B) technological progress; variations in labour-market utilization
C) money supply growth rates; changes in velocity
D) changes in velocity; money supply growth rates
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24. If the long-run aggregate supply curve is vertical, then changes in aggregate
demand affect:
A) neither prices nor level of output.
B) both prices and level of output.
C) level of output but not prices.
D) prices but not level of output.
25. When a long-term aggregate supply curve is drawn with real GDP (Y) along
the horizontal axis and the price level (P) along the vertical axis, this curve:
A) slopes upward and to the right.
B) slopes downward and to the right.
C) is horizontal.
D) is vertical.
26. When the Bank of Canada reduces the money supply, at a given price level
the amount of output demanded is ______ and the aggregate demand curve
shifts ______.
A) greater; inward
B) greater; outward
C) lower; inward
D) lower; outward
27. Throughout much of the 1990s, North America experienced declining energy
prices. Assume that the Canadian economy was in long-run equilibrium
before these declines began.
a.
b.
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29. The theory of liquidity preference implies that the quantity of real money
balances demanded is:
A) negatively related to both the interest rate and income.
B) positively related to both the interest rate and income.
C) positively related to the interest rate and negatively related to income.
D) negatively related to the interest rate and positively related to income.
30. According to the Keynesian-cross analysis, if the marginal propensity to
consume is 0.6, and government expenditures and autonomous taxes are
both increased by 100, equilibrium income will rise by:
A) 0.
B) 100.
C) 150.
D) 250.
31. a.
b.
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32. Tax cuts stimulate ______ by improving worker's incentive and expand ______
by raising households' disposable income.
A) velocity; demand for loanable funds
B) demand for loanable funds; velocity
C) aggregate demand; aggregate supply
D) aggregate supply; aggregate demand
33. The simple investment function shows that investment ______ as ______
increases.
A) decreases; the interest rate
B) increases; the interest rate
C) decreases; government spending
D) increases; government spending
34. The IS curve shows combinations of ______ that are consistent with
equilibrium in the market for goods and services:
A) inflation and unemployment
B) the price level and real output
C) the interest rate and the level of income
D) the interest rate and real money balances
35. In the Keynesian-cross analysis, if the consumption function is given by C =
100 + 0.6(Y T), and planned investment is 100, G is 100, and T is 100,
then equilibrium Y is:
A) 350.
B) 400.
C) 600.
D) 750.
36. The IS curve provides combinations of interest rates and income that satisfy
equilibrium in the market for ______, and the LM curve provides combinations
of interest rates and income that satisfy equilibrium in the market for ______.
A) saving and investment; planned spending
B) real-money balances; loanable funds
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B) 200.
C) 300.
D) 400.
42. Two identical countries, Alpha and Beta, can be described by the IS-LM
model in the short run. The governments of both countries cut taxes by the
same amount. The Central Bank of Alpha follows a policy of holding a
constant money supply. The Central Bank of Beta follows a policy of holding
a constant interest rate. Compare the impact of the tax cut on income and
interest rates in the two countries.
43. In the IS-LM model when M remains constant but P rises, in short-run
equilibrium, in the usual case, the interest rate ______ and output ______.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls
44. Other things equal, a given change in money supply has a larger effect on
demand, the:
A) larger the income sensitivity of money demand.
B) smaller the income sensitivity of money demand.
C) flatter the LM curve.
D) steeper the IS curve.
45. If the IS curve is given by Y = 1,700 100r and the LM curve is given by Y =
500 + 100r, then equilibrium income and interest rate are given by:
A) Y = 1,100, r = 6 percent.
B) Y = 1,200, r = 5 percent.
C) Y = 1,000, r = 5 percent.
D) Y = 1,100, r = 5 percent.
46. A change in income in the IS-LM model for a fixed price
A) represents a shift in the aggregate demand curve.
B) represents a movement along the aggregate demand curve.
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b.
c.
d.
If the saving rate (s) is 0.4, what are capital per worker, production
per worker, and consumption per worker in the steady state? (Hint:
Use sy = k and y = k1/2 to get an equation in s, , k, and k1/2, and
then solve for k.)
Solve for steady-state capital per worker, production per worker,
and consumption per worker with s = 0.6.
Solve for steady-state capital per worker, production per worker,
and consumption per worker with s = 0.8.
Is it possible to save too much? Why?
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51. The economies of two countries, North and South, have the same production
functions, depreciation rates, and saving rates. The economies of each
country can be described by the Solow growth model. Population growth is
faster in South than in North.
a.
b.
c.
52. Explain how the Solow growth model differs from models of endogenous
growth with respect to:
a.
b.
53. A central bank reduces the money supply in an economy initially in long-run
equilibrium.
a.
b.
c.
b.
Be sure to label:
i. the axes
ii. the curves
iii. the initial equilibrium values
iv. the direction the curve shifts
v. the terminal equilibrium values.
Explain in words what happens to equilibrium interest rate as a
result of the open-market purchase.
55. According to the IS-LM model, if the government raises taxes but the Bank of
Canada wants to hold the interest rate constant, then the Bank of Canada
must ______ the money supply.
A) increase
B) decrease
C) first increase and then decrease
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Answer Key
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
C
D
B
D
C
C
D
C
C
B
C
A
D
A
A
A
A
C
B
A
C
D
B
D
D
C
a.
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b.
28. a.
b.
c.
The Bank of Canada must reduce the money supply in the short
run, in order to return the economy to the natural rate, moving
the economy to point C with a permanently lower price level.
In the short run, output will increase as the reduction in money
demand (increase in velocity) shifts the aggregate demand curve out
to the right. There will be little change in prices in the short run.
The central bank could counteract the decline in money demand by
reducing the money supply, shifting the aggregate demand curve
back to the left.
In the long run, with no central bank stabilizing action, output will
return to the full-employment level with a higher price level.
29. D
30. B
31. a.
b.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
D
A
C
C
C
B
B
A
C
D
The interest rate will increase in Alpha, but remain constant in Beta. The
increase in output will be larger in Beta because the Central Bank of Beta
will increase the money supply to keep the interest rate constant in the face
of the tax cut. Thus, there will be no crowding out of investment in Beta, but
there will be crowding out in Alpha because of the higher interest rate.
A
B
A
A
Output increases in the IS-LM model, but is fixed at the natural level in the
classical model because it is determined by the factors of production and
technology. In both models, consumption increases because the tax cut
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The accommodating policy means that the price level is permanently higher,
but output is at the full-employment level.
50. a. k = 16; y = 4; Consumption per worker is 2.4.
b. k = 36; y = 6; Consumption per worker is 2.4.
c. k = 64; y = 8; Consumption per worker is 1.6.
d. Yes. If the capital stock gets so big that the extra output produced
by more capital is less than the extra saving needed to maintain it,
extra capital reduces consumption per worker. The saving rate
exceeds the Golden Rule rate.
51. a. North will have a higher level of steady-state output per worker
because the population growth is faster in South. The same
saving in both countries means that investment in both
countries will be the same. However, capital will be spread more
thinly per worker in the South, where the population is growing
more rapidly. Given the same production functions, output per
worker will be higher in the North because it has a higher capital
per worker ratio than the South.
b. In the steady state in both countries, capital per worker is
constant, so output per worker is constant. The growth rate of
output per worker is zero in both North and South.
c. In the steady state, total output grows at the rate of population
growth. Since South has a higher rate of population growth, the
growth rate of total output will be higher in South than in North.
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52. a.
b.
53. a.
b.
c.
54. a.
b.
55. B
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