Deck 3: Classical Macroeconomics I: Output and Employment

Question 1

Explain how an increase in technology,which increases the productivity of labor,will affect the labor market,the production function,and aggregate output.Provide graphs to illustrate.

Answer 1

An increase in technology will shift the labor demand curve to the right,leading to an increase in the real wage and an increase in labor.The aggregate production function will shift upward because of the increase in technology,and there will also be a movement along the production function as the quantity of labor increases.Both of these factors will increase aggregate output.

Question 2

The classical economists attacked the mercantilist propositions that

A)state action was necessary to direct the capitalist system.
B)money had no intrinsic value.
C)output was completely supply-determined.
D)the wealth of a nation was closely linked to the country's stock of precious metals.
E)Both a and d

Answer 2

E

Question 3

A proportionate increase in the price level and the money wage in the classical model

A)increase labor supply.
B)decrease labor supply.
C)leave labor supply unchanged.
D)affect labor supply but the direction of the effect is uncertain.

Answer 3

C

Question 4

Is it possible to have a production function that exhibits both a diminishing marginal product of labor and constant returns to scale? Explain.

Question 5

The supply of labor in the classical system is a function of the

A)marginal product of labor.
B)real wage.
C)the public's preference for leisure.
D)money wage.
E)b and c

Question 6

If the demand for labor is plotted against the money wage,with the money wage on the vertical axis,then

A)an increase in the price level will cause the labor demand schedule to shift to the right.
B)an increase in the money wage will cause the labor demand schedule to shift to the left.
C)an increase in the money wage will cause the labor demand schedule to shift to the right.
D)the labor demand schedule will be upward sloping.

Question 7

What two principles of mercantilism did the classicists attack?

Question 8

The supply-determined nature of output and employment is a crucial feature of

A)the Keynesian theory.
B)the classical system.
C)monetarism.
D)the rational expectations model.

Question 9

Which of the following is not consistent with perfect competition?

A)all firms face the same costs.
B)firms cannot determine the price of the goods they sell.
C)the marginal product of labor is diminishing.
D)firms negotiate the same wages for different workers.

Question 10

The author of The Wealth of Nations; The author of the General Theory

A)David Ricardo; John Maynard Keynes.
B)Adam Smith; A.C.Pigou.
C)Adam Smith; David Ricardo
D)Adam Smith; John Maynard Keynes.
E)Adam Smith; John Stuart Mills.

Question 11

As the real wage increases,assuming that the substitution effect dominates,then

A)individuals move to lower indifferent curves and consume less leisure.
B)individuals move to higher indifferent curves and consume less leisure.
C)individuals move to higher indifferent curves and consume more leisure.
D)individuals stay on the same indifferent curve and consume more leisure.

Question 12

Which of the following is not consistent with perfect competition?

A)Workers bargain individually for their wages.
B)Labor demand is determined by real wages and the marginal product of labor.
C)The marginal product of labor is diminishing.
D)Workers have no influence on their wages but accept them as given.
E)None of the above.

Question 13

A production function relates

A)the level of output to the level of technology.
B)the price level to the level of aggregate output.
C)aggregate output to the level of inputs and technology.
D)aggregate demand to aggregate supply.

Question 14

Is there a positive or negative relationship between real wages and output in the classical model? Explain.

Question 15

What is Real Business Cycle Theory? What drives business cycles in this model? Where do these shocks come from?

Question 16

In the classical macroeconomic model,a decrease in the real wage would cause

A)a decrease in the marginal product of labor and an increase in the quantity demanded for labor.
B)an increase in the marginal product of labor and an increase in the quantity demanded for labor.
C)no change in the quantity demanded for labor.
D)an increase in both the supply of and demand for labor.

Question 17

Explain why the labor supply curve is positively sloped.Explain why labor demand is downward sloping.

Question 18

Suppose that the government imposes a tax on firms for money wages they pay.How would this change the classical aggregate supply curve? Why?

Question 19

Briefly define an endogenous variable and an exogenous variable.What variables are endogenous in the classical model? What variables are exogenous.

Question 20

Using a graph of the classical labor market,illustrate the effects of a real wage existing in the market that is lower than the equilibrium real wage.What will eventually happen in this labor market if it is perfectly competitive?

Question 21

Which of the following are endogenous variables within the classical model?

A)output
B)technology
C)quantity of money
D)level of capital
E)a,b,and d

Question 22

In the classical model,and increase in tax on firms that hired labor would

A)decrease labor demand and the real wage and increase output.
B)decrease labor supply,increase the real wage,and decrease output.
C)decrease labor demand,decrease the real wage,and decrease output.
D)reduce real wages and increase output.

Question 23

A profit-maximizing firm hires labor until

A)the price of output equals the price of labor.
B)the price of output equals the marginal product of labor
C)the real wage equals the marginal product of labor.
D)the real wage equals the marginal product of labor multiplied by the price of output.

Question 24

The aggregate demand curve for labor is the

A)vertical summation of the individual firms' demand curves.
B)horizontal summation of the individual firms' demand curves.
C)horizontal summation of all the individual supply curves.
D)vertical summation of the individual firms' supply curves.

Question 25

In the classical model,

A)firms are assumed to be perfect competitors who choose their output level so as to maximize profits.
B)the perfectly competitive firm will increase output until the marginal cost of producing one unit of output equals the marginal revenue received from the sale of that particular unit of output.
C)marginal revenue is equal to product price for the perfectly competitive firm.
D)All of the above

Question 26

Which of the following factors will not determine output and employment in the classical model?

A)Taxes that affect the incentive to work or hire labor
B)The level of government spending
C)The quantity of capital
D)Preferences for leisure
E)None of the above

Question 27

With respect to the classical labor market analysis,it is not assumed that

A)firms have complete information with respect to relevant prices.
B)workers negotiate for unique wages individually.
C)money wages adjust with a short lag.
D)All of the above
E)None of the above

Question 28

The marginal product of labor is

A)the value of output for an addition dollar's worth of input.
B)output divided by the quantity of labor.
C)the additional output produced by adding an additional unit of labor.
D)the price of the output produced by increasing labor.
$$\text { Figure } 3.1$$

Question 29

The classical model is a model in which

A)governmental policies are needed to ensure full employment.
B)wages and prices are perfectly flexible.
C)the public has perfect information.
D)None of the above
E)b and c

Question 30

In the classical model,the factors determining output and employment are the factors that ascertain the position(s)of

A)the labor supply curve only.
B)the labor demand curve only.
C)the aggregate production function.
D)both the labor supply curve and the labor demand curve.
E)Both c and d

Question 31

With respect to Figure 3.1,the classicists argued that

A)the relevant aggregate supply curve is labeled B.
B)the curves labeled B and G are both relevant during recessions.
C)only the supply curve labeled M is important.
D)None of the above

Question 32

According to the classical model,workers chose a level of labor that equates the

A)real wage and marginal product of labor.
B)nominal wage and marginal product of labor.
C)the marginal utility of consumption and the marginal disutility of lost leisure.
D)the marginal utility of consumption with the real wage.

Question 33

If the wealth effect of an increase in the real wage was greater than the substitution effect of an increase in the real wage

A)the labor supply curve would slope upward.
B)the labor supply curve would slope downward.
C)the labor supply curve would be vertical.
D)the labor demand curve would solely determine the real wage.

Question 34

If real wages fall as output rises,then in the classical model it must be the case that

A)labor demand rose.
B)labor demand fell.
C)labor supply rose.
D)labor supply fell.
E)none of the above.

Question 35

If there is an increase in the price level in the classical model,

A)the equilibrium level of output will remain unchanged.
B)real wages remain constant.
C)money wages will rise proportionally.
D)all of the above.

Question 36

In the classical model,a decrease in immigration would

A)decrease labor supply,increase the real wage,and decrease output.
B)increase labor supply and the real wage,and decrease output.
C)increase labor demand and the real wage,and increase output.
D)reduce real wages and reduce output.

Question 37

Assuming a 10-percent decrease in both the nominal (money)wage and the price level in the classical model,then the quantity of labor supplied will

A)also decrease by 10 percent.
B)increase by 10 percent.
C)remain constant.
D)decrease by less than 10 percent.

Question 38

Which of the following will increase the marginal product of labor in the labor market?

A)An increase in the price level and the money wage.
B)An increase in the real wage.
C)A decrease in the capital stock.
D)An increase in the supply of labor.

Question 39

If a natural disaster destroys some of the capital stock,then the classical model predicts

A)labor demand,real wages,and output will fall.
B)labor demand and real wages will rise,output will fall.
C)the labor market remains unchanged but output falls.
D)None of the above

Question 40

Diminishing marginal returns refers to the fact that

A)holding other inputs constant,additional increases in labor lead to smaller changes in output.
B)holding other inputs constant,additional increases in labor lead to lower output.
C)additional increases in labor always lead to smaller changes in output
D)the returns to labor fall as real wages rise.

Question 41

Which of the following statements is correct? Classical economists

A)believe demand as well as supply determines aggregate output.
B)believed in an active role for government in managing the economy through tax policy.
C)gave little explicit attention to factors that determined the overall demand for commodities.
D)were worried about depressions that could come about because of too little government consumption.

Question 42

The increased willingness of women to enter the workforce has most likely lead to what outcome in the labor market?

A)an increase in labor demand and higher real wages.
B)an increase in labor supply and higher real wages.
C)an increase in labor supply and high real wages.
D)a decrease in labor demand and lower real wages.
E)none of the above.

Question 43

Which of the following is not an exogenous factor of production in the aggregate production function?

A)Technology
B)The real wage
C)Capital
D)Labor
E)These are all factors of production.

Question 44

With respect to an auction market,

A)labor and output are assumed to be traded in markets that are not always in equilibrium.
B)all participants make decisions based on announced nominal wage rates.
C)all participants make decisions based on announced product prices.
D)All of the above
E)None of the above

Question 45

In the classical model,a tax on capital will

A)increase the demand for labor,the real wage,and output.
B)increase the supply of labor,reduce real wages,and increase output.
C)decrease the demand for labor,the real wage,and output.
D)have no effect on the labor market.
E)increase both labor demand and supply,which will increase output.

Question 46

Classical economists

A)focused on the role of money as an asset for savings.
B)stressed the need for money in order to spur economic activity.
C)argued that,in the short run,an increase in the quantity of money would lead to an increase in demand for commodities and would stimulate production and employment.
D)None of the above

Question 47

Which of the following is consistent with diminishing marginal returns?

A)increasing labor by 10% and output increasing 10%.
B)increasing labor by 10% and output prices increase by less than 10%.
C)increasing labor by 10% and the marginal product of labor increasing 10%.
D)increasing labor by 10% and output increasing by less than 10%.

Question 48

To classical economists,it is always true that

A)there is zero unemployment.
B)actual output is always equal to potential output.
C)excess demand for goods is possible unless prices are forced to fall.
D)the marginal product of labor exceeds the real wage.

Question 49

A vertical aggregate supply schedule implies that

A)real wages cannot impact output.
B)unemployment cannot impact output.
C)aggregate demand is horizontal.
D)the price level does not impact output.

Question 50

Assuming a 5-percent decrease in both the nominal (money)wage and 5-percent increase in the price level in the classical model,then

A)both the quantity supplied and demanded of labor will increase.
B)the quantity supplied of labor will increase and the quantity demanded of labor will decrease.
C)both the quantity supplied and demanded of labor will decrease.
D)the quantity of labor supplied and demanded would remain constant.

Question 51

In a perfectly competitive market,firms take:

A)the money wage as exogenous,the price level as endogenous.
B)the money wage and price level as exogenous,the quantity of labor as endogenous.
C)the money wage and price level as endogenous.
D)the quantity of labor as exogenous.

Question 52

An increase in immigration would

A)have no effect on the labor supply curve and real wages.
B)shift the labor supply curve to the left and increase real wages.
C)shift both the labor demand curve and the labor supply curve to the left.
D)shift the labor supply curve to the right and decrease real wages.

Question 53

Which statement best defines the classical perspective?

A)Aggregate supply determines aggregate demand.
B)Aggregate demand does not matter for anything.
C)Aggregate supply determines real variables such as output.
D)Aggregate demand determines all endogenous variables.

Question 54

In the classical model,the supply-determined nature of output is illustrated by a(n)

A)horizontal aggregate supply curve.
B)vertical aggregate supply curve.
C)upward sloping aggregate supply curve.
D)downward sloping aggregate supply curve.

Question 55

According to the classical model,in the labor market

A)perfect information about the market price by market participants is required.
B)the labor market is always in equilibrium.
C)prices and wages are perfectly flexible.
D)both suppliers and purchasers of labor must know the relevant trading prices.
E)All of the above.

Question 56

An increase in taxes on labor earnings,everything else equal

A)shifts the labor supply curve to the left and increases the real wage.
B)shifts the labor supply curve to the right and increases the real wage.
C)shifts the labor supply curve to the right and reduces the real wage.
D)shifts the labor supply curve to the left and reduces the real wage.

Question 57

Assuming a worker's money wage rose from $10 per hour to $20 per hour while all product price have doubled,then in the classical model,this worker would

A)supply more labor after the wage increase.
B)supply less labor after the wage change.
C)supply the same amount of labor after the hourly wage increase.
D)demand less leisure.