Practice Questions 6-
I. True/False and explain:
1) The classical model is a macroeconomic model that tries to explain both short-run and long run behavior of the economy.
2) The classical model focuses primarily on explaining both real and nominal values.
3) One of the assumptions of the classical model is that the labor market and the loanable funds market are always in equilibrium.
4) The Keynesian model was developed to explain fluctuations around the long-run trend, while the classical model is used to explain the long-run trend itself.
5) Market clearing is a reasonable assumption in the short-run.
6) According to the classical view, the economy needs the government's help in achieving full employment.
7) In the labor market, like any other market for goods and services, households are on the demand side and firms are on the supply side.
8) In the classical model there is no structural unemployment.
9) The aggregate production function displays the relationship between total employment and total output in the economy using different amount of resources.
10) The aggregate production function displays increasing returns to labor because it is upward sloping.
11) Say's law assures us that leakages will always equal injections in an economy.
12) In the classical model net taxes and government purchases are referred to as leakages.
13) In the Loanable funds market, the government could be either on the supply or demand side, depending on whether it is running a budget deficit or a surplus.
14) Lower interest rates tend to stimulate planned investment.
15) In the classical model, leakages from the income-expenditure stream include taxes, saving, and exports.
16) In the classical model, an increase in government spending will partially crowd out investment and consumption spending.
17) An increase in government spending will lead to an increase in total output in the long run.
18) A increase in social security payments will change the interest rate and furthermore, will provide an incentive for households to save more.
19) Increases in employment, with a constant capital stock, tend to raise productivity.
II. Multiple Choices:
20) Under the market clearing assumption, an excess supply of a certain good will result in a(n)
a. Increase in price and decrease in quantity demanded
b. Decrease in price and increase in quantity demanded
c. Decrease in price and decrease in quantity demanded
d. Increase in price and increase in quantity demanded
21) Consider the following demand and supply of labor information for the country of Simpleland:
LS = (1/2)w - 10
LD = 50 - 2w
(w = real hourly wage)
At a real hourly wage of $20
a. the labor market in Simpleland is in equilibrium.
b. there is an excess demand of 10 workers.
c. there is an excess demand of 25 workers.
d. there is an excess supply of 10 workers.
22) To determine GDP from the production function, we need to know
a. the unemployment rate.
b. the quantity of labor supplied by firms.
c. the quantity of labor available for work.
d. the quantity of labor employed.
23) In the Classical model, a fiscal policy that increases government spending and taxes equally is probably going to lead to
a. a decrease in private consumption, savings and investment.
b. a decrease in saving, but an increase in investment.
c. a decrease in investment.
d. complete crowding out of investment.
24) Consider the following information about the country of Simpleland
(G - T) = $600
T = $600
I = $800 - 4000 iR
The equilibrium interest rate, iR, is 10%
According to the Classical model, leakages in this problem equal
a. $1,600.
b. $1,200.
c. $800.
d. $2,000.
III. Problems:
25) The tables below show a nation's labor demand and labor supply schedules and its production function
|
Real wage rate
(2003 dollars)
|
Quantity of
labor demanded
(billions of hours per year)
|
Quantity of
labor supplied
(billions of hours per year)
|
Employment
(billions of hours per year)
|
Real GDP
(billions of 2003 dollars)
|
|
50
|
80
|
100
|
60
|
3.0
|
|
40
|
90
|
90
|
70
|
4.0
|
|
30
|
100
|
80
|
80
|
4.7
|
|
20
|
110
|
70
|
90
|
5.2
|
|
10
|
120
|
60
|
110
|
5.5
|
a. What is the equilibrium real wage rate?
b. What is the equilibrium quantity of labor?
c. What is the potential GDP?
26) The following table summarizes the demand and supply of labor for the country of Wanderland:
| Real Hourly Wage |
Supply of labor
(number of workers)
|
Demand of labor
(number of workers)
|
|
$7
|
500 ,000
|
4,000,000
|
|
$10
|
1,000,000
|
3,000,000
|
|
$15
|
2,000,000
|
2,000,000
|
|
$21
|
3,000,000
|
1,500,000
|
Suppose that the real hourly wage in this country is now $10.
a. What is the current situation in the market?
b. According to the classical view, what is going to happen in this market?
c. What is the real hourly wage at full employment?
d. If the Aggregate production function is:
Output = 500,000 + 2,600,000,000,000,000/Number of Workers
what is the full employment output of the economy?
27) You have the following information about the economy in year 2004:
Savings = $ 2.5 billion.
Planned Investment = $ 4 billion.
Government purchases = $ 1.5 billion.
Taxes = $ 3 billion.
a. Compute the budget deficit.
b. Compute the quantity of loanable funds supplied.
c. Compute the quantity of loanable funds demanded.
d. Is the loanable funds market clearing in this economy?
e. Compute total leakages and total injections in this economy.
28) The country of Simpleland produces only Widgets. The following information is available:
Output: 225,000 Widgets
Employed: 25,000 people
Population: 75,000 people
a. What is the productivity of labor in Simpleland?
b. What is GDP per capita in this economy?
c. A higher real wage induces 50% of the idle population to find a job. Following the increase in labor, output raises by 25,000 Widgets. What are the new levels of productivity and GDP per capita in Simpleland?