econ 103 midterm 1

Question 1

what is macroeconomics and what does is study?

Answer 1

Macroeconomics is the study of the economy as a whole, including growth in incomes/changes in the overall level of prices/the unemployment rate /the financial system

Question 2

What do macroeconomists attempt to explain?

Answer 2

Macroeconomists attempt to explain the economy and to devise policies to
improve its performance.

Question 3

What do economists use to examine different issues?

Answer 3

Economists use different models to examine different issues.

Question 4

Where are the values of endogenous variables determined?

Answer 4

The values of endogenous variables are determined in the model,

Question 5

Where are the values of exogenous variables determined?

Answer 5

The values of exogenous variables are determined outside the model (the model takes their values & behavior as given)

Question 6

What do models with flexible prices describe?

Answer 6

Models with flexible prices describe the economy in the long run

Question 7

What do models with sticky prices describe?

Answer 7

models with
sticky prices describe the economy in the short run

Question 8

Does macroeconomics uses tools from microeconomics?

Answer 8

YES, Macroeconomic events and performance arise from many microeconomic
transactions, so macroeconomics uses many of the tools of microeconomics.

Question 9

What does GDP measure?

Answer 9

Gross Domestic Product (GDP) measures both total income and
total expenditure on the economy’s output of goods & services.

Question 10

What does Nominal GDP value?

Answer 10

Nominal GDP values output at current prices real GDP values output at constant
prices. Changes in output affect both measures, but changes in prices only affect
nominal GDP

Question 11

What do changes in output affect? What do changes in prices affect?

Answer 11

Changes in output affect both measures BUT changes in prices only affect nominal GDP

Question 12

What is GDP the sum of?

Answer 12

GDP is the sum of consumption, investment, government purchases, and net
exports.

Question 13

The overall level of prices can be measured by either:

Answer 13

the Consumer Price Index (CPI) is the price of a fixed basket of goods purchased by the typical consumer.
& the GDP deflator, is the ratio of nominal to real GDP

Question 14

What is the unemployment rate?

Answer 14

The unemployment rate is the fraction of the labor force that is not employed.

Question 15

Total output is determined by:

Answer 15

the economy’s quantities of capital and labor – the level of technology

Question 16

Competitive firms hire each factor until its marginal product ____ its price.

Answer 16

Competitive firms hire each factor until its marginal product equals! its price.

Question 17

If the production function has constant returns to scale, then labor income plus
capital income _____ total income (output).

Answer 17

If the production function has constant returns to scale, then labor income plus capital income equals total income (output).

Question 18

The real interest rate adjusts to equate the demand for and supply of:

Answer 18

goods and services, and loanable funds

Question 19

A closed economy’s output is used for:

Answer 19

Consumption (C), Investment (I) , and government spending (G)

Question 20

What does a decrease in national savings cause?
(Interest rate & investment)

Answer 20

A decrease in national saving causes the interest rate to rise and investment to
fall.

Question 21

What does an increase in investment demand cause?

Answer 21

An increase in investment demand causes the interest rate to rise, but does not affect the equilibrium level of investment if the supply of loanable funds is fixed.

Question 21

The Solow growth model shows that, in the long run, a country’s standard of living depends:

Answer 21

positively on its saving rate & negatively on its population growth rate

Question 22

An increase in the saving rate leads to:

Answer 22

higher output in the long run /faster growth temporarily /but not faster steady-state growth /
Case Study: The Miracle of Japanese and German Growth

Question 23

What happens if the economy has more capital than the Golden Rule level?

Answer 23

If the economy has more capital than the Golden Rule level, then reducing saving will increase consumption at all points in time, making all generations better off.

Question 24

What happens if the economy has less capital than the Golden Rule level?

Answer 24

If the economy has less capital than the Golden Rule level, then
increasing saving will increase consumption for future generations, but
reduce consumption for the present generation

Question 25

Key results from Solow model with tech progress:

Answer 25

Steady-state growth rate of income per person depends solely on the
exogenous rate of tech progress

Question 26

The Malthusian Model (1798)

Answer 26

predicts population growth will outstrip
the Earth’s ability to produce food, leading to the impoverishment of
humanity. Malthus neglected the effects of technological progress

Question 27

The Kremerian Model (1993)

Answer 27

posits that population growth contributes
to economic growth. As world population growth rate increased, so did
rate of growth in living standards; regions with larger populations have
enjoyed faster growth

Question 28

Ways to increase the saving rate

Answer 28

Increase public saving (reduce budget deficit)
Tax incentives for private saving

Question 29

Early 1970s: productivity growth __ in the U.S. and other countries.
Mid 1990s: productivity growth _____, probably because of
advances in information technology.
Late 2000s: growth ____ again because of global financial crisis and
recession.

Answer 29

Early 1970s: productivity growth fell in the U.S. and other countries. – Mid 1990s: productivity growth increased, probably because of
advances in information technology. – Late 2000s: growth fell again because of global financial crisis and
recession.

Question 30

Solow model:

Answer 30

explains balanced growth, conditional convergence

Question 31

Cross-country variation in living standards is due to ________________________.

Answer 31

Cross-country variation in living standards is due to differences in capital accumulation and in production efficiency.

Question 32

legal institutions?
capital markets?
a corruption-free government?

Answer 32

Legal institutions: to protect property rights. Capital markets: to help financial capital flow to the best investment
projects.
A corruption-free government: to promote competition, enforce
contracts, etc.

Question 33

Patent laws

Answer 33

Patent laws: encourage innovation by granting temporary monopolies to
inventors of new products; Tax incentives for R&D; Grants to fund basic
research at universities

Question 34

Economic growth as “creative destruction”

Answer 34

Schumpeter (1942) coined term “creative destruction” to describe
displacements resulting from technological progress – the introduction of a new product is good for consumers but often bad
for incumbent producers, who may be forced out of the market.

Question 35

Endogenous growth theory: Models that…

Answer 35

examine the determinants of the rate of technolgy progress, which Solow
takes as given.
explains decisions that determine the creation of knowledge through R&D