Test 2

Question 1

Which market determines the real wage and employment?

Answer 1

labor market

Question 2

In the equation that describes the production function, and increase in total factor productivity is represented by

Answer 2

an increase in A

Question 3

The marginal product of capital is measured by ____.

Answer 3

the slope of the line tangent to the production function relating output and capital

Question 4

An increase in the real wage would result in a movement ____

Answer 4

along the labor demand curve, causing a decrease in the number of workers hired by the firm.

Question 5

A temporary adverse supply shock that reduces productivity affects the labor market by

Answer 5

shifting the labor demand curve to the right.

Question 6

The level of output that firms in the economy supply when wages and prices have fully adjusted is known as

Answer 6

full-employment output

Question 7

unemployment rate =

Answer 7

total available force / labor force unemployed

Question 8

What are the factors of production?

Answer 8

K=Capital & N=Labor

Question 9

What is the production function equation?

Answer 9

Y=AF(K,N);

Question 10

The shape of the production function slopes (upward/downward)?

Answer 10

slopes upward

Question 11

What is the marginal product of capital equation?

Answer 11

MPK = change in Y / change in X

Question 12

What is the marginal product of labor equation?

Answer 12

MPN = change in Y / change in X

Question 13

What does the MPN measure?

Answer 13

benefit of employing one additional worker in terms of extra output

Question 14

What is the marginal revenue product of labor equation?

Answer 14

MRPN = P X MPN

Question 15

What does MRPN measure?

Answer 15

MRPN (marginal revenue of product of labor) measures the extra revenue produced by employing one additional worker

Question 16

What is the symbol for the nominal wage?

Answer 16

W = nominal wage

Question 17

What is the real wage?

Answer 17

the wage measured in terms of units of output

Question 18

What is the real wage equation?

Answer 18

real wage (w) = W (nominal wage) / P (price of output)

Question 19

a decrease in the real wage _____ the amount of labor demanded?

Answer 19

raises

Question 20

an increase in the real wage ______ the amount of labor demanded

Answer 20

decreases

Question 21

what is the name is the graph showing the relationship between the amount of labor demanded by a firm and the real wage that the firm faces?

Answer 21

labor demand curve

Question 22

define the aggregate demand for labor

Answer 22

aggregate demand for labor is the sum of the labor demands of all firms in the country

Question 23

define the aggregate supply of labor

Answer 23

aggregate supply of labor is the sum of labor supplied by everyone in the economy

Question 24

define leisure (in economy terms)

Answer 24

all off-the-job activities

Question 25

an increase in the real wage _____ the benefit of working an additional hour and thus tends to make the worker _______ more labor?

Answer 25

...real wage raises the benefit ...... make the worker want to supply more labor

Question 26

what is the substitution effect of a higher real wage?

Answer 26

tendency of workers to supply more labor in response to a higher reward for working

Question 27

the aggregate amount of labor supplied _____ in response to a temporary increase in the real wage, but _____ in response to a permanent increase in the real wage

Answer 27

rises; falls

Question 28

The desire to have a relatively smooth pattern of consumption over time is known as the

Answer 28

consumption-smoothing motive

Question 29

An increase in expected real interest rates would probably cause desired national saving to rise because

Answer 29

the increased return makes saving more attractive.

Question 30

The substitution effect of the real interest rate on saving

Answer 30

reflects the tendency to reduce current consumption as the real interest rate increases.

Question 31

The expected real after-tax rate of return on saving is the after-tax nominal rate of return minus expected

Answer 31

inflation.

Question 32

The yield curve shows the relationship between _____ and _____.

Answer 32

maturity; interest rate

Question 33

The Ricardian equivalence proposition says that

Answer 33

a budget deficit caused entirely by a current tax cut has no effect on the economy.

Question 34

When firms carry out new investment, the user cost of capital

Answer 34

remains constant as the amount of capital increases.

Question 35

In calculating the tax-adjusted user cost of capital, the user cost of capital is

Answer 35

divided by (1 – tax rate).

Question 36

An adverse supply shock that reduces the future marginal product of capital would cause a firm's desired capital stock to _____ and the firm's desired investment to _____.

Answer 36

decline; decline

Question 37

The level of capital stock increases

Answer 37

if gross investment exceeds depreciation.

Question 38

Your firm has capital stock of $15 million and a depreciation rate of 10%. Gross investment is $2.5 million. How much is net investment?

Answer 38

$ 1.0 million

Question 39

A lump-sum increase in current taxes would cause interest rates to

Answer 39

fall if Ricardian equivalence did not hold.

Question 40

A reduction in government spending will shift the

Answer 40

saving curve to the right.

Question 41

user cost equation

Answer 41

UC = (r + d)Pk

Question 42

What are major determinants of consumer spending

Answer 42

current income, wealth, govt purchases, expected future income, real interest rate, taxes

Question 43

______ relationship between consumption and current income

Answer 43

positive

Question 44

______ relationship between consumption and real interest rate.

Answer 44

negative

Question 45

What is Okum's rule of thumb?

Answer 45

whenever the unemployment rate goes up by 1% there is a 2% drop in the growth of output for the economy

Question 46

What is frictional unemployment?

Answer 46

between jobs, but just due to searching. jobs are available

Question 47

Wat is structural unemployment?

Answer 47

mismatch between job skills of unemployed workers and skills req'd by employers

Question 48

What is cyclical unemployment?

Answer 48

fluctuation in aggregate demand for good and services in economy.

Question 49

What factors determine investment spending?

Answer 49

real interest rates, effective rate on capital, tech changes, future marginal product of capital

Question 50

Classical model deals with _____.

Answer 50

supply side (how goods and services are produced)

Question 51

What two forces determine level of unemployment?

Answer 51

demand and supply

Question 52

Investment spending accounts for about ___% of GDP

Answer 52

15%