Chapter 7 Flashcards
Wages and prices are fully flexible given
shifts in demand and supply.
Full employment output is determined in two steps
obtain equilibrium labor employed in the labor market, and then determine full employment output using the production function
- Classical economics is based on the principle that prices:
adjust in a natural way to bring the markets for goods and labor into equilibrium.
The school of economics that uses the tools of classical economics to
explain why economic booms and recessions occur is:
real business cycle theory.
The assumption that distinguishes the classical model from Keynesian
models is that:
wages and prices adjust freely and quickly to all changes in demand
and supply.
The relationship between output and labor in a model holding capital
stock fixed is known as the
short run production function
Suppose that the stock of capital is held constant and the amount of
labor is increased. Beyond the point of diminishing returns output will:
increase at a decreasing rate
An increase in the stock of capital makes the aggregate production
function:
shift up
The demand for labor curve shows:
an inverse relationship between the real wage and the amount of labor
hired.
If the real wage falls the:
a. marginal cost of labor falls.
b. firm will hire additional labor
The substitution effect of a wage increase is the:
increase in labor supply associated with an increase in the
opportunity cost of not working.
A higher wage rate will lead to increases in the amount of labor supplied if the:
b. substitution effect is stronger than the income effect.
Suppose that firms reduce their capital stock. What should happen to
wages and the quantity of labor?
d. wages decrease, quantity of labor decreases
As the result of an increase in capital the demand for labor would
_______, the supply of labor would ________, and the quantity of labor
hired would __________.
b. increase, remain the same, increase. People’s willingness to supply their labor is unchanged. Therefore the labor supply curve does not shift.
As a result of immigration, the demand for labor would _______, the
supply of labor would ______, and the real wage would ________.
c. remain the same, increase, decrease. The demand for labor doesn’t change (this is of course assuming
that the immigrants don’t bring loads of money with them) but the labor supply
curve shifts out. Therefore employment increases and wages fall.
Suppose that workers develop a greater taste for leisure. What should
happen to wages and the quantity of labor?
b. wages increase, quantity of labor decreases. The labor supply curve shifts back, demand does not change and
the new equilibrium is at a higher wage and lower employment. Higher wage
because ¯rms must bid up the wage to attract workers.
If an economist observed that both wages and employment decreased in a
particular country, the economist would suggest that it was caused by:
a decrease in the demand for labor.
The level of output produced when the labor market is in equilibrium is
called:
full-employment output.
The argument that higher taxes lead to less employment is most likely to
hold if:
c. labor supply has a relatively flat slope.
If labor supply is vertical,
b. tax increases will have no effect on output.
Decreases in consumption, investment, or net exports caused by an
increase in government purchases are known as:
d. crowding out.
