ECON 322.

12516 Intermediate Macroeconomic Theory

Homework 2 Answer Key

Due by Monday, June 2, 2014
Please hand in both your scantron and this homework IN CLASS.
Full Score: 25 points


Multiple Choice (There exists one and only one correct choice. Each question is
worth 0.5 points. Total score: 30*0.5=15)

1) Based on the aggregate supply relation, an increase in current output will cause
A) a shift of the aggregate supply curve.
B) an increase in the current price level.
C) a change in the expected price level this year.
D) an increase in the expected price level and an upward shift of the AS curve.
E) an increase in the markup over labor costs.
Answer: B
Diff: 2

2) Based on your understanding of the AS/AD model, which of the following is an
INCORRECT statement about the short-run adjustment process for the
macroeconomy?
A) output in excess of the natural level leads to higher prices.
B) a reduction in employment leads to lower prices.
C) an increase in demand increases output.
D) an increase in output above the natural level leads to higher nominal wages.
E) none of the above
Answer: E
Diff: 2

3) The neutrality of money is consistent with which of the following statements?
A) changes in the money supply will not affect employment in the short run.
B) changes in the money supply will not affect employment in the medium.
C) changes in the money supply will not affect the price level in the short run
D) changes in the money supply will not affect the price level in the medium run
Answer: C
Diff: 1

4) An increase in the price of oil will cause which of the following in the medium run?
A) no change in the level of output
B) no change in the price level
C) an increase in the unemployment rate
D) a reduction in the interest rate
E) none of the above
Answer: C
Diff: 2

5) For this question, assume that the economy is initially operating at the natural level
of output. An increase in the price of oil will cause which of the following in the
medium run?
A) a reduction in the interest rate
B) a reduction in output and an increase in the aggregate price level
C) a reduction in output and a reduction in the interest rate
D) a reduction in unemployment, an increase in the nominal wage and an increase in the
aggregate price level
E) a reduction in the aggregate price level and no change in output
Answer: B
Diff: 2

6) For this question, assume that the economy is initially operating at the natural level
of output. A reduction in consumer confidence will cause
A) an increase in investment in the short run.
B) a reduction in the real wage in the medium run.
C) an increase in the interest rate in the medium run.
D) ambiguous effects on investment in the medium run.
E) none of the above
Answer: E
Diff: 2

7) Since approximately 1970, the most stable Phillips-type relationship for the United
States has been between which of the following?
A) the rate of inflation and the change in the unemployment rate
B) the unemployment rate and the change in the rate of inflation
C) the change in the unemployment rate and the change in the rate of inflation
D) the inverse of the unemployment rate and the rate of inflation
E) the unemployment rate and the rate of inflation
Answer: B
Diff: 2

8) For this question, assume that the Phillips curve equation is represented by the
following equation:

t
-
t-1
= (m + z) - u
t
. A reduction in the unemployment rate will cause
A) a reduction in the markup over labor costs (i.e., a reduction in m).
B) an increase in the markup over labor costs.
C) an increase in the inflation rate over time.
D) a decrease in the inflation rate over time.
E) none of the above
Answer: D
Diff: 2

9) Which of the following will NOT cause an increase in the natural rate of
unemployment?
A) an increase in m
B) an increase in z
C) an increase in the expected inflation rate
D) a reduction in m
E) none of the above
Answer: C
Diff: 2

10) An increase in the price of oil will likely cause which of the following?
A) increase the markup in the Phillips curve equation
B) increase the sum "m+ z" in the Phillips curve equation
C) increase the natural rate of unemployment
D) all of the above
E) none of the above
Answer: D
Diff: 2

11) Use the following Phillips curve equation to answer this question:
t
-
t-1
= (m + z)
- u
t
. Which of the following will cause an increase in the natural rate of
unemployment?
A) a reduction in m
B) an increase in z
C) an increase in
D) a reduction in expected inflation
E) none of the above
Answer: B
Diff: 2

12) Assume that expected inflation is based on the following:
e
t
=
t-1
. An increase
in will cause
A) an increase in the natural rate of unemployment.
B) a reduction in the natural rate of unemployment.
C) no change in the natural rate of unemployment.
D) inflation in period t to be more responsive to changes in unemployment in period t.
Answer: C
Diff: 2

13) Using current exchange rates, the U.S. standard of living is ranked
A) higher than it would be under the purchasing power parity method.
B) lower than it would be under the purchasing power parity method.
C) number one in the world.
D) among the lowest in the world.
E) none of the above
Answer: B
Diff: 1

14) "Convergence" has been occurring among the OECD countries because
A) the richer countries give away more of their output than the poorer ones.
B) the poorer countries have had higher growth rates than the richer ones.
C) the richer countries have had higher growth rates than the poorer ones.
D) the poorer countries have had positive growth rates, while the richer ones have had
negative growth rates.
E) the procedures for measuring output per capita have been changing.
Answer: B
Diff: 1

15) Given the broadest interpretation of technology, technology will include which of
the following?
A) how well firms are run
B) the organization and sophistication of markets
C) the political environment
D) the list of blueprints defining the types of products and the techniques available to
produce them
E) all of the above
Answer: E
Diff: 1

16) Suppose there are two countries that are identical with the following exception. The
saving rate in country A is greater than the saving rate in country B. Given this
information, we know that in the long run
A) output per capita will be greater in B than in A.
B) output per capita will be greater in A than in B.
C) economic growth will be higher in A than in B.
D) more information is needed to answer this question.
Answer: B
Diff: 2

17) Over the past fifty years, convergence has generally occurred for all of the
following groups of countries with the exception of
A) the five richest countries.
B) European countries.
C) the 'four tigers' in Asia.
D) OECD countries.
E) none of the above
Answer: E
Diff: 1

18) For this question, assume that the saving rate increases. We know that this increase
in the saving rate will cause which of the following?
A) a temporary increase in the level of output per capita
B) no permanent change in the level of output per capita
C) a temporary increase in the rate of growth of output per capita
D) a permanently higher rate of growth of output per capita
E) none of the above
Answer: C
Diff: 2

19) A reduction in the saving rate will NOT affect which of the following variables in
the long run?
A) output per worker
B) the growth rate of output per worker
C) the amount of capital in the economy
D) capital per worker
E) none of the above
Answer: B
Diff: 2

20) The capital-labor ratio will tend to decrease over time when
A) investment per worker equals saving per worker.
B) investment per worker is less than saving per worker.
C) investment per worker exceeds depreciation per worker.
D) saving per worker equals depreciation per worker.
E) output per worker exceeds capital per worker.
Answer: B
Diff: 2

21) In the absence of technological progress, an increase in the saving rate will cause
which of the following?
A) increase temporarily the growth of output per worker
B) increase the steady state growth of output per worker
C) decrease temporarily the growth of output per worker
D) decrease the steady state growth of output per worker
E) have an ambiguous effect on the growth of output per worker
Answer: A
Diff: 2

22) Suppose there is an increase in the saving rate. This increase in the saving rate must
cause an increase in consumption per capita in the long run when
A) capital per worker approaches the golden-rule level of capital per worker.
B) the saving is used for education rather than physical capital.
C) the rate of saving exceeds the rate of depreciation.
D) there is no technological progress.
E) technological progress depends on human capital.
Answer: A
Diff: 2

23) Which of the following are reasons to suspect spending on education might
overestimate human capital investment?
A) education spending leaves out foregone wages.
B) part of total spending on education is really consumption.
C) much human capital investment comes from on-the-job training.
D) all of the above
E) none of the above
Answer: B
Diff: 1

24) At the current steady state capital-labor ratio, assume that the steady state level of
per capita consumption, (C/N)*, is less than the golden rule level of steady state per
capita consumption. Given this information, we can be certain that
A) an increase in the saving rate will cause an increase in the steady state level of per
capita consumption ((C/N)*).
B) a reduction in the capital-labor ratio will cause a reduction in (C/N)*.
C) the capital labor ratio will tend to increase over time.
D) the capital labor ratio will tend to decrease over time.
E) a reduction in the saving rate will have an ambiguous effect on (C/N)*.
Answer: E
Diff: 2

25) In the following production function, Y = f(K, NA), a 20% increase in A will cause
which of the following variables to increase by 20%?
A) labor
B) effective labor
C) output
D) output per worker
E) none of the above
Answer: B
Diff: 2

26) Which of the following will cause a reduction in the steady-state growth rate of
output per worker?
A) a reduction in the saving rate
B) an increase in the population growth rate
C) an increase in the rate of depreciation
D) an increase in the saving rate
E) none of the above
Answer: E
Diff: 2

27) Which of the following represents a dimension of technological progress?
A) larger quantities of output for given quantities of capital and labor
B) better products
C) a larger variety of products
D) new products
E) all of the above
Answer: E
Diff: 1

28) Assume that an economy experiences both positive population growth and
technological progress. In this economy, which of the following is constant when
balanced growth is achieved?
A) I
B) S
C) Y/N
D) all of the above
E) none of the above
Answer: E
Diff: 2

29) Assume that an economy experiences both positive population growth and
technological progress. Once the economy has achieved balanced growth, we know
that the capital per effective worker ratio (K/NA) is
A) growing at a rate of + g
A
+ g
N.
B) growing at a rate of g
A
+ g
N.
C) growing at a rate of g
N.
D) growing at a rate of g
A.
E) none of the above
Answer: E
Diff: 2

30) Assume that an economy experiences both positive population growth and
technological progress. Once the economy has achieved balanced growth, we know
that
A) S/NA = ( + g
A
+ g
N
)K/NA.
B) S/NA = (g
A
+ g
N
)K/NA.
C) I/NA = ()K/NA.
D) I = K.
E) none of the above
Answer: A
Diff: 2


Short Essay (Each question is worth 2 points. Total score: 5*2=10)

1) Explain what the aggregate demand curve represents and why it is downward
sloping.
Answer: The AD captures the effects of the price level on output. Alternatively, the
AD curve represents the combinations of P and Y that maintain equilibrium in the
goods and financial markets. As P falls, the real money supply increases causing a
reduction in the interest rate. The drop in the interest rate causes an increase in
investment, an increase in demand, and an increase in production. So, the drop in P
causes an increase in Y and the AD curve is upward sloping.

2) Based on the 'early incarnation' of the Phillips curve, explain what effect an increase
in the unemployment rate will have on the inflation rate.
Answer: An increase in u will cause a reduction in W. As W falls, firms' costs fall. As
firms' costs fall, they will reduce the price level. This reduction in the price level
represents, in this case, deflation.

3) Convergence refers to what phenomenon regarding growth theory?
Answer: Convergence refers to the phenomenon where the levels of output per capita
for countries tend to move closer to one another over time. This implies that countries
that start with relatively lower levels of output per worker catch up to other countries
and, in some cases, actually pass other countries.

4) Explain the relationship among output, saving, and investment.
Answer: The level of output (per worker) will depend on the capital-labor ratio. The
amount of capital will depend on investment (and depreciation). Investment will, in
turn, depend on the amount of saving. Changes in saving will cause changes in
investment, capital, and, therefore, output.

5) Assume the economy has achieved the balanced growth steady state. Explain what
factors determine the rates of growth of each of the following variables when balanced
growth is achieved: output per effective worker, capital per effective worker, output per
worker, output, and consumption per worker.
Answer: When balanced growth is achieved, K/NA and Y/NA are constant so their
rates of growth are 0. K and Y must, therefore, grow at the same rate as NA which
equals the sum of population growth and rate of TP. The rate of growth of Y/N will
equal the rate of growth of TP. C will grow at the same rate as Y.