PRACTICE QUESTIONS 4-
BINARY QUESTIONS:
1) "The economy will experiment business cycles but it will return to full employment within a few years or even less". This statement is most likely to reflect the views of
a. A Keynesian.
b. A Classical Economist.
2) Under the market clearing assumption, an excess supply of a certain good will
a. Drive the price of the good up.
b. Lead to a fall in the price of the good.
3) Fiscal Policies in the Classical model
a. Are unnecessary, because the economy will achieve the potential output and full employment automatically.
b. Can be used only if a country is not running a budget deficit.
4) If output grows slower than the population, then the average standard of living (represented by GDP per capita) will
a. Fall.
b. Rise.
5) In the last 5 years, the country of Wonderland experienced growth in employment. Analysis shows that this growth is due to an increase in the number of workers that firms hire at any given wage. We can deduce that the real hourly wage in this country is
a. Higher than 5 years ago.
b. Lower than 5 years ago.
6) If a country invests in policies supporting education, then in the long run this will most likely result in a
a. Higher unemployment rate.
b. Higher capital stock, in the form of human capital.
MULTIPLE CHOICES:
1) In the classical view, the labor market
a. Experiences cyclical unemployment.
b. Does not experience frictional or structural unemployment.
c. Automatically achieves full employment on its own.
d. Needs government action to ensure full employment.
2) If a country in a particular year has a national debt
a. It must have had a budget deficit in the previous year.
b. It must have had a budget surplus in the previous year.
c. It might have had a budget surplus or a budget deficit in the previous year.
d. Its supply of funds must be positive.
3) Assume that the Economy had an initial budget deficit and that an increase in government spending caused crowding out. This implies that
a. Both savings and the interest rate increased, but investment spending decreased.
b. Both savings and investment spending increased.
c. Both savings and consumption increased, but the interest rate decreased.
d. Both consumption and the interest rate decreased.
PROBLEMS:
1) The following table summarizes the demand and supply of labor for the country of Fantasyland:
| Real Hourly Wage |
Supply of labor
(number of workers)
|
Demand of labor
(number of workers)
|
|
$10
|
50
|
400
|
|
$15
|
100
|
300
|
|
$20
|
200
|
200
|
|
$25
|
300
|
150
|
Suppose that the real hourly wage in this country is now $15.
a. What is the current situation in the market?
b. What is going to happen, according to the classical view? What is the real hourly wage that guarantees full employment?
c. If the Aggregate production function is:
Output = 50 - 2500/50 + Number of Workers
what is the full employment output of the economy?
2) You have the following information about the economy in year 2002:
Savings = $ 2250
Planned Investment = $ 1300
Government purchases = $ 2000
Taxes = $ 1050
a. Is there a budget deficit or surplus in this economy? Compute it.
b. Compute the quantity of funds supplied and the quantity of funds demanded. Is the loanable funds market clearing in this economy?
c. Compute total leakages and total injections in this economy.
d. Does Say's law (total output=total expenditure) hold in this economy? Why?
3) The country of Simpleland produces only one good: food. The following information is available:
Output: 225,000 units
Employment: 75,000 people
a. What is the productivity of labor in Simpleland?
b. If the capital stock in Simpleland increases while all other variables do not change, what is going to happen to output?
c. Suppose the new output is 240,000 units. What is the change in the productivity of labor?
d. Suppose that the employment is constant, while the capital stock changes from $120M to $150M. What is the change in the capital per worker?
4) For each of the following statements, identify whether the statement represents a cost of economic growth. Explain your answer.
a. The government is forced to cut some of its programs because a tax cut approved to push growth has reduced its income for the present year.
b. A new technology increases the productivity of labor and output, however this technology generates more pollution than the original technology.
c. An increase in the average number of hours worked in each week has increased output, but it has reduced the number of hours of leisure.
d. A group of companies decides to distribute lower dividends to their shareholders this year because they plan to invest part of their profits in R&D activities.