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Homework answers / question archive / 1) The FE line is vertical because the level of output at full employment doesn't depend on the A) real wage rate

1) The FE line is vertical because the level of output at full employment doesn't depend on the A) real wage rate

Economics

1) The FE line is vertical because the level of output at full employment doesn't depend on the A) real wage rate.

  1. level of employment.
  2. marginal product of labour.
  3. real interest rate.

 

2) Classical economists argue that an increase in government expenditures will A) shift FE line to right increasing full-employment output.

  1. shift FE line to left decreasing full-employment output.
  2. shift FE line to right increasing interest rate.
  3. shift FE line to right decreasing labour supply.

 

3) A rise in expected future output that doesn't affect labour supply would shift the IS curve ________ and the FE line ________.

  1. down; is unchanged
  2. down; right
  3. up; is unchanged
  4. up; right

 

4) The low point in the business cycle is referred to as the A) contraction.

  1. recession.
  2. trough.
  3. depression.

 

5) Which of the following variables is procyclical?

  1. unemployment
  2. nominal interest rate
  3. real interest rate
  4. real wage

 

6) Which of the following statements is true?

  1. Financial variables are procyclical, but real variables are countercyclical.
  2. The nominal interest rate is procyclical and lagging, but the real interest rate is acyclical.
  3. Average labour productivity is acyclical, but the real wage is procyclical.
  4. Both exports and imports are procyclical.

 

7) The nominal exchange rate between the Canadian dollar and the Japanese yen is 80. It means that

  1. a dollar can buy 80 yen in the foreign exchange market.
  2. a yen can buy 80 cents in the foreign exchange market. 
  3. a dollar cay buy about 0.012 yen in the foreign exchange market.
  4. a yen can buy 0.20 cents in the foreign exchange market.

 

8) The main difference between the Keynesian and Classical models is that

  1. the Keynesian model assumes wages are rigid in the short run, but the Classical model assumes economic agents experience price misperception.
  2. the Classical model assumes expectations are rational, but the Keynesian model assumes economic agents do not have rational expectations.
  3. the Keynesian model suggests that anticipated changes in policies have real effects, but the Classical model suggests that only unanticipated changes in policies have real effects.
  4. the aggregate supply curve is upward sloping in the Keynesian model but vertical in the Classical model.

 

9) Three-wheel cars made in North Edsel are sold for 5000 pounds. Four-wheel cars made in South Edsel are sold for 10,000 marks. The real exchange rate between North and South Edsel is four three-wheel cars for three four-wheel cars. The nominal exchange rate between the two countries is

  1. 0.50 marks/pound.
  2. 0.66 marks/pound.
  3. 1.50 marks/pound D) 2.00 marks/pound.

 

10) A decrease in government purchases

  1. shifts the IS curve up and to the right, leading to a higher interest rate and an appreciation of the exchange rate.
  2. shifts the IS curve down and to the left, leading to a lower interest rate and a depreciation of the exchange rate.
  3. shifts the LM curve left, leading to a lower interest rate and a depreciation of the exchange rate.
  4. shifts the LM curve right, leading to a lower interest rate and a depreciation of the exchange rate.

 

11) Which of the following is an example of a real shock?

  1. an increase in the money supply
  2. a stock market crash
  3. a rise in oil prices
  4. a decrease in the money supply

 

12) A beneficial productivity shock would ________ output, ________ the real interest rate, and ________ the price level.

  1. increase; decrease; increase
  2. increase; decrease; decrease
  3. increase; increase; decrease
  4. decrease; decrease; increase

 

13) If you expect a general price increase of 5% this year and the price of the hamburgers you

sell increases by 10%, you would conclude that the relative price of your good has A) declined, and you would increase your output.

  1. declined, and you would decrease your output.
  2. increased, and you would increase your output.
  3. increased, and you would decrease your output.

 

14) In the Keynesian model, wages and prices are  A) sticky in the short run, but flexible in the long run. 

  1. sticky in the long run, but flexible in the short run. 
  2. forecast accurately by both employees and employers. 
  3. flexible in the short run and the long run. 

 

15) In the Keynesian model, money is

  1. neutral in both the short run and the long run.
  2. neutral in neither the short run nor the long run.
  3. neutral in the short run, but not in the long run.
  4. neutral in the long run, but not in the short run.

 

16) In a steady-state economy,

  1. the total capital stock remains constant.
  2. net investment remains constant.
  3. net investment equals the depreciation rate for the economy.
  4. the total capital stock grows at the same rate as the labour force. 

 

 

17) The reduction of the inflation rate is called A) deflation.

  1. disinflation.
  2. unflation.
  3. reflation.

 

18) Conditional convergence means that in the long run

  1. living standards converge only within groups of countries having similar characteristics.
  2. living standards converge only for countries that have the same initial capital-labour ratio.
  3. living standards around the world become the same.
  4. living standards converge even if countries have different population growth rates. 

 

 

19) The monetary base is equal to

  1. banks' reserves plus their holdings of Treasury securities.
  2. banks' reserves plus Bank of Canada funds.
  3. banks' reserves plus currency in circulation.
  4. M2 minus M1.

 

20) Which of the following statement is not true?

  1. In the Solow model, the marginal productivity of capital depends on the level of capital. 
  2. In the endogenous growth model, the marginal productivity of capital is diminishing. 
  3. In the Solow model, the marginal productivity of capital diminishes as capital increases. 
  4. In the endogenous growth model, the marginal productivity of capital is constant. 

 

 

 

 

 

 

 

 

Part B: Short Answer Questions (40 POINTS)

 

 

1) What are the major factors affecting standards of living and economic development across nations? How does the Solow model explain these factors? What are the key predictions of the model?

 

 

  1. Consider the closed economy IS-LM-FE model.

 

    1. Describe the effects of unanticipated expansionary monetary policy both in the short run and the long run using a Keynesian model. Explain what happens to output and the price level using IS-LM-FE graphical analysis. 

 

 

 

 

    1. How would the results in part a change if instead you used a Classical model? 

 

 

 

    1. Describe the effects of unanticipated expansionary fiscal policy both the short run and the long run using a Classical model. Explain what happens to output and the price level using IS-LM-FE graphical analysis. 

 

 

 

    1. Do Keynesians believe that unanticipated fiscal policy can impact output and employment in the short run and long run?

 

 

 

 

 

  1. Consider the open economy IS-LM-FE model.

 

    1. Describe the effects of contractionary fiscal policy by the domestic government on output, the real interest rate, and net exports in both the domestic and foreign country, using a Keynesian model.
    2. Describe the effects of an expansionary monetary policy by the domestic Central Bank on output, the real interest rate, and net exports in both the domestic and foreign country, using a Keynesian model in the short run. What happens in the long run?

 

 

 

4) Consider the open economy IS-LM-FE model. What happens to the exchange rate and net exports in each of the following cases? Answer using graphical analysis and explain in words. Show all your work.

 

  1. The foreign real interest rate rises.
  2. Foreign output falls.
  3. Foreign demand for domestic goods falls.
  4. Domestic output falls.
  5. The domestic real interest rate rises.

 

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