Deck 5: A Closed-Economy One-Period Macroeconomic Model

Question 1

A closed economy is characterized by

A) the absence of trade with other economies.
B) the absence of use of money for transactions.
C) no growth in population.
D) a Cobb-Douglas production function.

Answer 1

the absence of trade with other economies.

Question 2

In a one-period economic model,the government budget constraint requires that government spending

A) = taxes + transfers.
B) = taxes + borrowing.
C) > 0.
D) = taxes.

Answer 2

= taxes.

Question 3

Which of the following is not a property of a competitive equilibrium?

A) markets clear.
B) consumers and firms optimize given market prices.
C) the government budget constraint is satisfied.
D) increasing total factor productivity.

Answer 3

increasing total factor productivity.

Question 4

Making use of an economic model is a process of

A) solving hundreds of simultaneous equations.
B) running experiments to determine how changes in the endogenous variables will change the exogenous variables.
C) running experiments to determine how changes in the exogenous variables will change the endogenous variables.
D) resolving inconsistencies in the actions of economic agents.

Question 5

In a general equilibrium model

A) all markets but one clear.
B) there are no fluctuations.
C) all prices are exogenous.
D) all prices are endogenous.

Question 6

An economy that has no interaction with the rest of the world is called

A) an isolated economy.
B) a closed economy.
C) a parochial economy.
D) a rogue nation.

Question 7

The production possibilities frontier in the one-period model is a

A) behavioral relationship between consumption and leisure.
B) behavioral relationship between consumption and government spending.
C) technological relationship between consumption and leisure.
D) technological relationship between consumption and government spending.

Question 8

For a competitive equilibrium to occur,all of the following has to happen except

A) agents are price takers.
B) the government sets taxes at zero.
C) markets clear.
D) the actions of all agents are consistent.

Question 9

In an economic model,an exogenous variable is

A) a stand-in for more complicated variables.
B) determined by the model itself.
C) determined outside the model.
D) a variable that has no effect on the workings of the model.

Question 10

An economy that engages in international trade is called

A) a cooperative economy.
B) a modern economy.
C) an engaged economy.
D) an open economy.

Question 11

Which of the following is not a reason for solving the model with a PPF?

A) It merges the household and firm problems into one graph.
B) It is simpler to solve the social planner problem.
C) It highlights the fact that the marginal rate of substitution should equal the marginal rate of transformation.
D) It highlights the fact that firms make no profit in equilibrium.

Question 12

In an economic model,an endogenous variable is

A) a stand-in for more complicated variables.
B) determined by the model itself.
C) determined outside the model.
D) a variable that has no effect on the workings of the model.

Question 13

The production possibilities frontier represents

A) all combinations of consumption and leisure for fixed output.
B) all equally affordable combinations of consumption and leisure for a given wage.
C) all technologically feasible combinations of consumption and leisure.
D) all equally liked combinations of consumption and leisure.

Question 14

Fiscal policy encompasses all of the following except

A) expenditures by the government.
B) monetary injection by the government.
C) taxation by the government.
D) borrowing by the government.

Question 15

Which of the following relationships does not hold in the one-period model?

A) G=T
B) Y=C+G
C) Y=zF(K,N)
D) =Y-wN-C

Question 16

In a competitive equilibrium all these relationships hold but one. Which one?

A) Nd=Ns
B) Y=G+C
C) G=T
D) w=z

Question 17

Fiscal policy refers to a government's choices over its

A) expenditures, taxes, transfers, and borrowing.
B) expenditures, taxes, issuance of money, and borrowing.
C) expenditures, foreign affairs, issuance of money, and borrowing.
D) issuance of money, taxes, environmental regulations, and foreign affairs.

Question 18

A competitive equilibrium is a state of affairs in which

A) markets clear, and output is maximized.
B) output is maximized, and all agents are equally well-off.
C) all agents are equally well-off and agents are price-takers.
D) economic agents are price takers and markets clear.

Question 19

A relationship that shows the technological possibilities for an economy as a whole is called a

A) production function.
B) utility possibilities frontier.
C) production possibilities frontier.
D) budget constraint.

Question 20

In the one-period competitive model we have been studying

A) both consumption and total factor productivity are exogenous.
B) consumption is exogenous and total factor productivity is endogenous.
C) consumption is endogenous and total factor productivity is exogenous.
D) both consumption and total factor productivity are endogenous.

Question 21

An externality is any activity for which an individual firm or consumer does not take into account all

A) of the ramifications of its actions on others.
B) associated costs.
C) associated benefits.
D) associated costs and benefits.

Question 22

The PPF determines

A) all possible outcomes for a given wage.
B) the set of feasible outcomes.
C) given leisure, how much consumption a household wants.
D) the share of consumption in output.

Question 23

PPF is the

A) price parity formula.
B) possible production function.
C) producer's preferred frontier.
D) production possibilities frontier.

Question 24

A competitive equilibrium is Pareto optimal if there is no way to rearrange or to reallocate goods so that

A) anyone can be made better off.
B) no one can be made worse off.
C) someone can be made better off without making someone else worse off.
D) someone can be made better off without making everyone else worse off.

Question 25

The rate at which one good can be converted technologically into another is called

A) the marginal rate of transformation.
B) the marginal rate of substitution.
C) the marginal product of labor.
D) the rate of conversion.

Question 26

The concept of Pareto optimality is a

A) utopian concept.
B) useful concept because it guarantees economic equality.
C) useful concept because it defines economic efficiency.
D) useful concept that carefully balances a society's desires for equality and efficiency.

Question 27

The second fundamental theorem of welfare economics states that

A) under certain conditions, a competitive equilibrium is Pareto optimal.
B) a competitive equilibrium is always Pareto optimal.
C) under certain conditions, a Pareto optimum is a competitive equilibrium.
D) a Pareto optimum is always a competitive equilibrium.

Question 28

A competitive equilibrium has all of the following properties except

A) MPN = slope of PFF.
B) MRS?,C = MRT?,C.
C) MRT?,C = MPN.
D) MPN = w.

Question 29

The presence of a distorting tax on wage income can result in

A) MPN < MRT?,C.
B) MRT?,C < MRS?,C.
C) MPN < w.
D) MRS?,C < MPN

Question 30

A Pareto optimum is a point that

A) a malevolent dictator would choose.
B) a cooperative coalition of some altruistic consumers would choose.
C) a cooperative coalition of some socially responsible firms would choose.
D) a social planner would choose.

Question 31

A competitive equilibrium

A) is always economically efficient.
B) is efficient only if there is an externality.
C) is economically efficient only given some special conditions.
D) does not exist without government taxation.

Question 32

Relative to the social optimum,monopoly power tends to lead to

A) underproduction.
B) overproduction.
C) too much leisure.
D) too little leisure.

Question 33

Which of the following is not equal to the others in equilibrium?

A) the real wage
B) the marginal rate of substitution between leisure and consumption
C) the marginal product of labor
D) the price of consumption

Question 34

The first fundamental theorem of welfare economics states that

A) under certain conditions, a competitive equilibrium is Pareto optimal.
B) a competitive equilibrium is always Pareto optimal.
C) under certain conditions, a Pareto optimum is a competitive equilibrium.
D) a Pareto optimum is always a competitive equilibrium.

Question 35

A competitive equilibrium fails to be a Pareto Optimum with a distorting tax because

A) the consumer's budget constraint has an additional kink.
B) the firm is no longer maximizing profits.
C) the government wastes its revenue.
D) the consumer faces a different effective wage than the firm.

Question 36

Points on the production possibilities frontier have the property that they

A) are inherently unattainable.
B) show the maximum amount of leisure that can be consumed for given amounts of goods consumed.
C) show the maximum amount of goods that can be consumed for given amounts of government spending.
D) show the maximum amount of leisure that can be consumed for given amounts of hours worked.

Question 37

Under a Pareto Optimum

A) it is always possible to improve someone's welfare.
B) it is never possible to improve someone's welfare.
C) one can only reduce someone's welfare.
D) it is impossible to reduce someone's welfare.

Question 38

A competitive equilibrium may fail to be Pareto optimal due to all of the following except

A) inequality.
B) externalities.
C) distorting taxes.
D) non-price-taking firms.

Question 39

Much of the writings of Adam Smith are in close agreement with

A) the necessity of trade restrictions.
B) the first fundamental theorem of welfare economics.
C) the second theorem of welfare economics.
D) both B and C above.

Question 40

A Pareto optimum requires all of the following except

A)MPN= -slope of PPF.
B) MRS?,C = MRT?,C.
C) MRS?,C ? MPN.
D) MPN = w.

Question 41

If the government replaces a lump sum tax with a proportional labor income tax,then

A) employment and output increase.
B) employment increases and output decreases.
C) employment decreases and output increases.
D) employment and output decrease.

Question 42

With a linear production function in labor only,which of the following must be true?

A) The representative household works as much as possible.
B) The representative firm makes large profits.
C) The real wage equals total factor productivity.
D) The marginal product of labor exceeds the real wage.

Question 43

The variable G considered in the model encompasses

A) government expenses on goods.
B) government expenses on goods and services.
C) government expenses on goods and services as well as transfers.
D) government expenses on goods and services as well as transfers and public debt service.

Question 44

How does an increase in the proportional labor income tax modify the consumer's budget constraint?

A) a parallel move up
B) a parallel move down
C) the slope decreases (constraint gets steeper)
D) the slope increases (constraint gets flatter)

Question 45

An increase in total factor productivity

A) increases consumption, increases output, and increases the real wage.
B) reduces consumption, increases output, and increases the real wage.
C) reduces consumption, increases output and reduces the real wage.
D) reduces consumption, reduces output, and reduces the real wage.

Question 46

At the competitive equilibrium with a positive proportional labor income tax

A) the real wage after tax exceeds the marginal product of labor.
B) the real wage after tax equals the marginal product of labor.
C) the real wage after tax is lower than the marginal product of labor.
D) We cannot say.

Question 47

Changes in total factor productivity are plausible causes of business cycles because productivity-induced business cycles correctly predict

A) real wages and total hours must be procyclical.
B) real wages and consumption must be procyclical.
C) total hours worked and consumption must be procyclical.
D) consumption and government spending must be procyclical.

Question 48

An increase in government spending

A) increases consumption and output.
B) increases consumption, decreases output.
C) decreases consumption, increases output.
D) decreases consumption and output.

Question 49

An increase in government spending shifts the PPF

A) upward, but does not change its slope.
B) upward, and also changes its slope.
C) downward, but does not change its slope.
D) downward, and also changes its slope.

Question 50

In response to an increase in total factor productivity

A) both the substitution effect and the income effect suggest that hours worked should increase.
B) the substitution effect suggests that hours worked should increase, while the income effect suggests that hours worked should decrease.
C) the substitution effect suggests that hours worked should decrease, while the income effect suggests that hours worked should increase.
D) both the substitution effect and the income effect suggest that hours worked should decrease.

Question 51

An increase in government spending

A) increases consumption, increases hours worked, and increases the real wage.
B) reduces consumption, increases hours worked, and increases the real wage.
C) reduces consumption, increases hours worked, and reduces the real wage.
D) reduces consumption, reduces hours worked, and reduces the real wage.

Question 52

Which feature of the business cycle does the one-period model replicate with shocks to government expenditures?

A) procyclical employment
B) procyclical consumption
C) procyclical real wages
D) countercyclical prices

Question 53

Changes in government spending are not likely causes of business cycles because changes in government spending predict

A) countercyclical real wages.
B) procyclical real wages.
C) countercyclical employment.
D) procyclical employment.

Question 54

Proportional income taxation is distorting because

A) people do all they can to avoid paying taxes.
B) the competitive equilibrium is not Pareto optimal.
C) firms do all they can to avoid paying taxes.
D) the government budget constraint does not hold.

Question 55

A one-unit increase in government expenditures should,according to the model,increase GDP by

A) 0.
B) between zero and one unit.
C) one unit.
D) more than one unit.

Question 56

An increase in total factor productivity shifts the PPF

A) upward, but does not change its slope.
B) upward, and also changes its slope.
C) downward, but does not change its slope.
D) downward, and also changes its slope.

Question 57

Changes in total factor productivity are plausible causes of business cycles because

A) of the welfare theorems.
B) the U.S. government is following supply-side economic policy.
C) the model matches many stylized facts.
D) prices are countercyclical.

Question 58

Changes in government spending are not likely causes of business cycles because changes in government spending predict

A) countercyclical consumption.
B) procyclical consumption.
C) countercyclical employment.
D) procyclical employment.

Question 59

Real business cycle theory argues that the primary cause of business cycles is fluctuations in

A) preferences.
B) government spending.
C) the importance of externalities.
D) total factor productivity.

Question 60

Suppose total factor productivity increases. Which of the following is incorrect?

A) Households are better off.
B) Consumption goes up.
C) The real wage goes down.
D) Output goes up.

Question 61

In the model of public goods

A) government spending is pure waste
B) private consumption and government spending are equal.
C) consumers benefit from private goods and public goods.
D) the government provides goods at no cost to the public.

Question 62

If public goods can be produced more efficiently,then

A) public goods increase, and private goods may increase or decrease.
B) public goods production stays the same, and private goods increase.
C) public goods and private goods both increase.
D) public goods production falls, and private goods production rises.

Question 63

In the model of public goods

A) GDP is fixed.
B) there is a production function.
C) labor supply matters.
D) public goods production is proportional to labor input.

Question 64

The Laffer curve is a curve showing

A) output as a function of the tax rate.
B) tax revenue as a function of the tax rate.
C) government expenses as a function of how liberal the government is.
D) the tax rate as a function of government expenses.

Question 65

When the tax rate increases,the tax revenue

A) always increases.
B) does not change.
C) always decreases.
D) may increase or decrease.

Question 66

Supply-side economists argue that

A) one should get rid of all taxes.
B) tax rates should not be progressive.
C) increasing tax rates always hurts tax revenue.
D) one can increase tax revenue by decreasing the tax rate.

Question 67

The tax base is

A) the average tax rate.
B) the tax rate for the base year.
C) the object being taxed.
D) the lowest tax rate.

Question 68

If GDP increases in the model of public goods

A) people are richer, so they need less public goods.
B) there is substitution from private goods to public goods.
C) if the government provides public goods optimally, public and private goods production both increase.
D) all of the increase in GDP goes into public goods.

Question 69

At the competitive equilibrium with a positive proportional labor income tax

A) the real wage before tax exceeds the marginal product of labor.
B) the real wage before tax equals the marginal product of labor.
C) the real wage before tax is lower than the marginal product of labor.
D) We cannot say.

Question 70

In the model of public goods,when the government chooses public goods provision optimally

A) there is no public goods production.
B) public goods are provided in an amount equal to private goods.
C) the marginal rate of substitution of private goods for public goods equals the marginal rate of transformation.
D) GDP is maximized.