Deck 6: Building Blocks of the Flexible-Price Model

Question 1

The flexible-price assumption means that

A) prices and wages don't change very quickly in response to excess demand or supply.
B) prices and wages are flexible enough for markets to clear.
C) prices are flexible enough for markets to clear but wages are not.
D) output will adjust in response to excess demand or supply.

Answer 1

prices and wages are flexible enough for markets to clear.

Question 2

The flexible-price assumption means most importantly

A) that supply equals demand in the labor market.
B) that the economy reaches an equilibrium at which there is unemployment.
C) that there is always excess demand in the labor market.
D) that wages are always decreasing.

Answer 2

that supply equals demand in the labor market.

Question 3

Each of the following is a key question which chapter 6 seeks to answer except

A) What determines the growth rate of an economy?
B) What determines the level of consumption spending?
C) What determines the level of real GDP?
D) What determines the level of investment spending?

Answer 3

What determines the growth rate of an economy?

Question 4

Each of the following is a key question which chapter 6 seeks to answer except

A) What economic forces keep real GDP at its equilibrium level?
B) What determines the rate of growth of the capital-labor ratio?
C) What determines the level of real GDP?
D) What determines the level of the exchange rate?

Question 5

Each of the following is a key question which chapter 6 seeks to answer except

A) What determines the level of net exports?
B) What determines the level of consumption spending?
C) What determines the inflation rate?
D) What determines the level of investment spending?

Question 6

Each of the following is a key question which chapter 6 seeks to answer except

A) What is a full employment analysis?
B) What determines the level of consumption spending?
C) What determines the level of real GDP?
D) What determines the rate of growth of the money supply?

Question 7

Each of the following is a key question which chapter 6 seeks to answer except

A) What determines the composition of real GDP?
B) What determines the level of consumption spending?
C) What determines the fluctuations in real GDP?
D) What determines the level of investment spending?

Question 8

Two sets of factors determine the levels of potential (and actual) output and of real wages in the flexible-price model of the macroeconomy:

A) the production function balance of exports and imports.
B) the production function and the balance of savings and investment.
C) the production function and the balance of supply and demand in the labor market.
D) the production function and the balance of supply and demand in the stock market.

Question 9

The Classical assumption that prices adjust rapidly to eliminate gaps between quantities demanded and quantities supplied means

A) that businesses find inventories of unsold goods piling up.
B) that unemployment exists at the equilibrium wage in the labor market.
C) that no businesses find inventories of unsold goods piling up.
D) that businesses find increasing delays in receiving goods ordered from suppliers.

Question 10

The Classical assumptions of the macroeconomy include each of the following except

A) wages and prices are fully flexible.
B) expectations are volatile and can take many forms.
C) the labor market is always in equilibrium with full employment.
D) shocks to aggregate demand will change the composition but not the level of GDP.

Question 11

The Classical assumptions of the macroeconomy include each of the following except

A) wages and prices can be "sticky" or "fixed."
B) expectations are consistent with full employment.
C) the labor market is always in equilibrium with full employment.
D) shocks to aggregate demand will change the composition but not the level of GDP.

Question 12

The Classical assumptions of the macroeconomy include each of the following except

A) wages and prices are fully flexible.
B) expectations are consistent with full employment.
C) the labor market can be out of equilibrium causing involuntary employment.
D) shocks to aggregate demand will change the composition but not the level of GDP.

Question 13

The Classical assumptions of the macroeconomy include each of the following except

A) wages and prices are fully flexible.
B) expectations are consistent with full employment.
C) the labor market is always in equilibrium with full employment.
D) shocks to aggregate demand will change the composition and the level of GDP.

Question 14

The Keynesian assumptions of the macroeconomy include each of the following except

A) wages and prices can be "sticky" or "fixed."
B) expectations are volatile and can take many forms.
C) the labor market is always in equilibrium with full employment.
D) shocks to aggregate demand will change the composition and the level of GDP.

Question 15

The Keynesian assumptions of the macroeconomy include each of the following except

A) wages and prices can be "sticky" or "fixed."
B) expectations are consistent with full employment.
C) the labor market can be out of equilibrium, causing involuntary unemployment.
D) shocks to aggregate demand will change the composition and the level of GDP.

Question 16

The Keynesian assumptions of the macroeconomy include each of the following except

A) wages and prices can be "sticky" or "fixed."
B) expectations are volatile and can take many forms.
C) the labor market can be out of equilibrium, causing involuntary unemployment.
D) shocks to aggregate demand will change the composition but not the level of GDP.

Question 17

The Keynesian assumptions of the macroeconomy include each of the following except

A) wages and prices are fully flexible.
B) expectations are volatile and can take many forms.
C) the labor market can be out of equilibrium, causing involuntary unemployment.
D) shocks to aggregate demand will change the composition and the level of GDP.

Question 18

When markets work well, the main factor keeping the economy at full employment and actual production equal to potential output is

A) the adjustment of interest rates in the money market.
B) the adjustment of the demand for products to the supply of products.
C) the adjustment of prices and supply and demand in the labor market.
D) the adjustment of government spending to tax revenue.

Question 19

In order to achieve highest possible level of profit, the typical firm in the economy should

A) stop hiring labor when the extra profit from selling the output produced by the last worker hired just equals the value of the last worker's wage.
B) stop hiring labor when the extra revenue from selling the output produced by the last worker hired just equals the value of the last worker's wage.
C) stop hiring labor when the extra price from selling the output produced by the last worker hired just equals the value of the last worker's wage.
D) stop hiring labor when the extra revenue from selling the output produced by the last worker hired becomes less than the value of the last worker's wage.

Question 20

The value of the output produced by the last worker hired is

A) the product price times the output produced.
B) the product price times the output produced minus the wage times the amount of labor hired.
C) the product price times the marginal product of labor.
D) the wage times the marginal product of labor.

Question 21

The cost of hiring the last worker is

A) his or her wage.
B) his or her marginal product.
C) the value of his or her marginal product.
D) his or her profit.

Question 22

The benefit of hiring the last worker is

A) his or her wage.
B) his or her marginal product.
C) the value of his or her marginal product.
D) his or her profit.

Question 23

A typical firm's profit is found by the following formula:

A) P x L - W x Y
B) P x W - L x Y
C) P x MPL - W
D) P x Y - W x L

Question 24

In order to maximize its profits, a typical firm should follow the following formula:

A) P x L = W x Y
B) P x W = L x Y
C) P x MPL = W
D) P x Y = W x L

Question 25

The marginal product of labor is (holding capital stock constant)

A) the difference between what the firm can produce with its current labor force and what it would produce if it hired one more worker.
B) the product between what the firm can produce with its current labor force and what it would produce if it hired one more worker.
C) the sum of what the firm can produce with its current labor force and what it would produce if it hired one more worker.
D) the ratio of between what the firm can produce with its current labor force and what it would produce if it hired one more worker.

Question 26

The MPL for the Cobb-Douglas production function with K=1 is

A)
B)
C)
D)

Question 27

The typical firm's demand for labor for the Cobb-Douglas production function with K=1 is

A)
B)
C)
D)

Question 28

If there are N firms for the whole economy, the employment-wide employment for the Cobb-Douglas production function with K=1 is

A)
B)
C)
D)

Question 29

The labor supply in an economy is

A) the number of people in the economy.
B) the total adult population of the economy.
C) the number of workers who want to work.
D) the number of workers employed.

Question 30

The labor market will be in equilibrium

A) when all of the people in the economy are employed.
B) when firm's total demand for workers is equal to the labor force.
C) when the number of workers employed equals the total adult population of the economy.
D) when P x MPL = W

Question 31

In the Classical Model, if the quantity of labor demanded at current wages and prices is less than the quantity of labor supplied

A) unemployment will result.
B) the real wage will increase.
C) the real wage will not change.
D) the real wage will decrease.

Question 32

In the Classical Model, if the quantity of labor demanded at current wages and prices is greater than the quantity of labor supplied

A) unemployment will result.
B) the real wage will increase.
C) the real wage will not change.
D) the real wage will decrease.

Question 33

In the Classical Model, if the real wage increases, the quantity of labor demanded will _______ until it is ________ the quantity of labor supplied

A) increase; equal to
B) increase; less than
C) decrease; equal to.
D) decrease; more than.

Question 34

Using the Cobb-Douglas production function, the real wage in equilibrium will be

A) (1- ) x (K/L).
B) (1- ) x (Y/L).
C) (1- ) x (L/Y).
D) (1- ) x (L/K).

Question 35

In a full employment economy, the real wage will ________ if _________.

A) increase; decreases
B) decrease; decreases
C) increase; increases
D) none of the above

Question 36

In a full employment economy, the real incomes of those who don't own any capital stock will ________ if _________.

A) decrease; increases
B) decrease; decreases
C) increase; increases
D) none of the above

Question 37

If markets work well

A) the actual output level in the economy will be less than the economy's potential output level.
B) the actual output level in the economy will be equal to the economy's potential output level.
C) the actual output level in the economy will be greater than the economy's potential output level.
D) the actual employment level in the economy will equal the population of the economy.

Question 38

The four components of total spending are

A) consumption spending, savings, government purchases, net exports.
B) consumption spending, investment spending, government purchases, gross exports.
C) consumption spending, investment spending, tax revenue, net exports.
D) consumption spending, investment spending, government purchases, net exports.

Question 39

National income can also be found by

A) summing the wages of workers plus the profits of property owners.
B) summing the wages of workers and the savings of households.
C) summing the profits of property owners and the taxes paid to governments.
D) summing the wages of workers and the taxes paid to governments.

Question 40

Household disposable income

A) is equal to the income that household throw out.
B) is equal to income minus savings.
C) is equal to income minus net taxes.
D) is equal to savings plus net taxes.

Question 41

National income can be divided into

A) investment spending, saving, net taxes.
B) consumption spending, saving, government purchases.
C) consumption spending, investment spending, net taxes.
D) consumption spending, saving, net taxes.

Question 42

Consumption spending equals

A) income minus investment spending minus net taxes.
B) income minus net taxes minus savings.
C) income minus government purchases minus net taxes.
D) income minus savings minus net exports.

Question 43

In the United States today, consumption spending

A) adds up to roughly two-thirds of GDP.
B) adds up to roughly one-third of GDP.
C) is the most volatile component of GDP.
D) is sometimes larger than income.

Question 44

In the model developed in the text, consumption spending (C) is broken down into

A) a baseline level of consumption (C₀) plus a fraction (C_y) of total income.
B) a baseline level of consumption (C₀) plus a fraction (C_y) of disposable income.
C) a baseline level of consumption (C₀) plus a fraction (C_y x (1-t)) of disposable income.
D) a fraction (C_y) of disposable income.

Question 45

In the model developed in the text, consumption spending (C) is equal to

A) C₀ + C_y x Y^D.
B) C₀ + C_y x Y.
C) C₀ + C_y x (1-t)Y^D.
D) C_y x Y^D.

Question 46

Other determinants of consumption spending include each of the following except

A) household wealth.
B) expectations of income growth.
C) real exchange rate.
D) permanent vs. transitory income.

Question 47

Other determinants of consumption spending include each of the following except

A) real interest rate.
B) expectations of income growth.
C) tolerance for risk..
D) permanent vs. transitory investment.

Question 48

Other determinants of consumption spending include each of the following except

A) household wealth.
B) nondiscretionary income.
C) income distribution.
D) relative optimism or pessimism.

Question 49

Other determinants of consumption spending include each of the following except

A) government purchases.
B) expectations of income growth.
C) household wealth.
D) permanent vs. transitory income.

Question 50

The baseline level of consumption (C₀)

A) is the amount by which consumption spending changes in response to a $1 change in total income.
B) is the amount households would spend on consumption goods if they had no income at all.
C) is the amount by which consumption spending changes in response to a $1 change in disposable income.
D) is the amount by which consumption spending would change in response to a $1 change in household wealth.

Question 51

The marginal propensity to consume (MPC, C_y)

A) is the amount by which consumption spending changes in response to a $1 change in total income.
B) is the amount households would spend on consumption goods if they had no income at all.
C) is the amount by which consumption spending changes in response to a $1 change in disposable income.
D) is the amount by which consumption spending would change in response to a $1 change in household wealth.

Question 52

The value of C_y, the MPC,

A) is generally less than 0.
B) is generally greater than 1.
C) is usually between 0 and 1.
D) generally increases as income increases.

Question 53

If the value of C_y, the MPC, is equal to .75

A) the marginal propensity to save is equal to .25.
B) the marginal propensity to save is equal to .75.
C) the tax rate is equal to .1.
D) the marginal propensity to save is equal to 0.

Question 54

If the value of C_y, the MPC, is equal to .75 and the tax rate is equal to .1

A) the marginal propensity to save is equal to .15.
B) the marginal propensity to save is equal to .65.
C) the marginal propensity to save is equal to .25.
D) the marginal propensity to save is equal to 0.

Question 55

If C₀ is $1 trillion, C_y is .75, the tax rate is .20, and the level of national income is $10 trillion, consumption spending would equal

A) $8.5 trillion.
B) $7 trillion.
C) $3 trillion.
D) $6 trillion.

Question 56

If C₀ is $1 trillion, C_y is .75, the tax rate is .20, and the level of national income is $10 trillion, the level of savings would equal

A) $1 trillion.
B) $3 trillion.
C) $2.5 trillion.
D) $2 trillion.

Question 57

If C₀ is $2 trillion, C_y is .8, the tax rate is .10, and the level of national income is $15 trillion, consumption spending would equal

A) $14 trillion.
B) $12 trillion.
C) $12.8 trillion.
D) $10.8 trillion.

Question 58

If consumption spending changes by $6 trillion when disposable income changes by $8 trillion, the marginal propensity to consume is equal to

A) $2 trillion.
B) 1.333.
C) $14 trillion.
D) .75.

Question 59

If consumption spending changes by $5 trillion when disposable income changes by $8 trillion, the marginal propensity to save is equal to

A) $3 trillion.
B) .625.
C) $13 trillion.
D) .375

Question 60

In the United States today, investment spending averages roughly ________ of GDP and is _________ component of GDP.

A) 65%; the most volatile and variable
B) 15%; the most stable
C) 15%; the most volatile and variable
D) 65%; the most stable

Question 61

When economists use the term "investment" or "investment spending,"
They are

A) talking about activities such as buying a stock or a bond.
B) talking about transactions that add to the capital stock and increase potential output.
C) talking about activities such as buying a certificate of deposit or commodity futures.
D) talking about transactions that result in interest being paid to the buyer.

Question 62

Fluctuations in economy-wide investment spending have two sources:

A) changes in interest rates and changes in business managers' confidence.
B) changes in tax rates and changes in interest rates.
C) changes in regulations and changes in tax rates.
D) changes in stock prices and changes in interest rates.

Question 63

Investment spending tends to vary _______ with real interest rates and _______ with business managers' confidence.

A) directly; inversely
B) directly; directly
C) inversely; inversely
D) inversely; directly

Question 64

Transactions that add to the capital stock and increase potential output include each of the following except

A) the purchase and installation of new business machinery and equipment.
B) the purchase of stocks.
C) the construction and purchase of a new building.
D) a change in business inventories.

Question 65

The amount of investment that replaces obsolete and worn-out capital is called

A) gross investment.
B) net investment.
C) depreciation or capital consumption.
D) tax-free investment.

Question 66

Economists categorize investment spending in each of following uses except

A) residential construction.
B) purchase of a bond.
C) non-residential construction.
D) equipment investment.

Question 67

Economists categorize investment spending in each of following uses except

A) inventory investment.
B) residential construction.
C) purchase of land.
D) equipment investment.

Question 68

Economists categorize investment spending in each of following uses except

A) non-residential construction.
B) inventory investment
C) equipment investment.
D) the renting of office space.

Question 69

A business invests because its managers believe that the investment project

A) will be socially useful.
B) will be profitable.
C) will provide an adequate interest rate.
D) can be sold at a higher price in the future.

Question 70

In order for an investment project to be profitable

A) the appropriately discounted return on the investment must be greater than the investment's cost.
B) the appropriately discounted return on the investment must be less than the investment's cost.
C) the appropriately discounted return on the investment must be greater than the appropriate interest rate.
D) the appropriately discounted return on the investment must be less than the appropriate interest rate.

Question 71

A lower interest rate leads to higher investment spending because

A) higher interest rates lower the appropriately discounted return and make more investment projects profitable.
B) lower interest rates lower the appropriately discounted return and make more investment projects profitable.
C) higher interest rates lower the appropriately discounted return and make fewer investment projects profitable.
D) lower interest rates increase the appropriately discounted return and make fewer investment projects profitable.

Question 72

The present value of an investment project ________ if the real interest rate _______.

A) decreases; decreases
B) decreases; increases
C) increases; increases
D) stays the same; increases

Question 73

The present value of an investment project ________ if the expected stream of profits _________.

A) decreases; decreases
B) decreases; increases
C) increases; increases
D) stays the same; increases

Question 74

The interest rate most relevant to determining investment spending

A) is the short-term, nominal, risk-free interest rate.
B) is the long-term, nominal, risky interest rate.
C) is the short-term, real, risky interest rate.
D) is the long-term, real, risky interest rate.

Question 75

The investment function consists of

A) a baseline level of investment (I₀) and a term consisting of the real interest rate times the MPC.
B) a baseline level of investment (I₀) and a term consisting of the real interest rate times I_r (the slope-of-. the-investment function parameter).
C) a baseline level of investment (I₀) and the real interest rate.
D) a baseline level of investment (I₀) and a term consisting of the real interest rate times disposable income.

Question 76

The investment function is

A) I₀ + I_r x r
B) I₀ - I_r x _YD
C) I₀ - I_r x r
D) I₀ + I_r x Y^D

Question 77

If I₀ is equal to $3 trillion, I_r is equal to $15000 billion, and r is 5%, investment spending would equal

A) $750 billion.
B) $3.75 trillion.
C) $14850 billion.
D) $2.25 billion.

Question 78

If investment spending changes by $500 billion when the real interest rate changes by 5 percentage points, then I_r is equal to

A) $100 billion.
B) $10000 billion.
C) $2500 billion.
D) $25 billion.

Question 79

If the baseline level of investment expenditures, I₀, increases by $1 trillion, then investment spending will

A) decrease by $1 trillion.
B) increase by $1 trillion times the real interest rate.
C) increase by $1 trillion.
D) remain the same.

Question 80

Another view of investment spending is that it tends to be

A) a function of consumption spending.
B) a function of stock market prices.
C) a function of government spending.
D) a function of the dividends paid to owners of stocks.