Ch 5 Closed Economy One Period Model

Question 0

An economy that engages in international trade is called

Answer 0

An open economy

Question 1

An economy that has no interaction with the rest of the world is

Answer 1

A closed economy

Question 2

Goods and services provided by the government are called

Answer 2

Public goods

Question 3

In an economic model an exogenous variable is

Answer 3

Determined outside the model

Question 4

In an economic model an endogenous variable ism

Answer 4

Determined by the model itself

Question 5

In a one period model government is likely to run

Answer 5

Neither a surplus nor a deficit

Question 6

In a one period model the government budget constraint requires that government spending

Answer 6

=taxes

Question 7

Which of the following relationships does not hold in the one period economic model

Answer 7

N=y-wN-c

Question 8

Fiscal policy refers to a governments choices over its

Answer 8

Expenditures,taxes, transfers and borrowing

Question 9

Making use of an economic model is a process of

Answer 9

Running experiments to determine how changes in the exogenous variables will change endogenous variables

Question 10

A competitive equilibrium is a state of affairs which

Answer 10

Agents are price takers and markets clear

Question 11

In a general economic model all prices are

Answer 11

Endogenous

Question 12

A relationship that shows the technological possibilities for an economy as a whole is called

Answer 12

production possibilities frontier

Question 13

The production possibilities frontier in the one-period model is a

Answer 13

all feasible combinations of consumption and leisure.

Question 14

Which of the following is not a reason for solving the model with a PPF?
A) it merges the household and firm problems into one graph.
B) It is simpler to solve the social planner problem.
C) it highlights the fact that the marginal rate of substitution should equal the marginal rate of transformation.
D) It highlights the fact that firms make no profit in equilibrium.

Answer 14

D. It highlights the fact that firms make no profit in equilibrium.

Question 15

The PPF represents

Answer 15

the set of feasible outcomes

Question 16

The rate at which one good can be converted technologically into another is called

Answer 16

the marginal rate of transformation.

Question 17

Points on the production possibilities frontier have the property that they

Answer 17

show the maximum amount of leisure that can be consumed for given amounts of goods consumed.

Question 18

A competitive equilibrium has all of the following properties except  
A) MPN = slope of PPF.  
B) MRSl,C = MRTl,C.  
C) MRTl,C = MPN.  
D) MPN = w.

Answer 18

A) MPN = slope of PPF.

Question 19

A competitive equilibrium is Pareto optimal if there is no way to rearrange or to reallocate goods so that

Answer 19

C) someone can be made better off without making someone else worse off.

Question 20

Which of the following is not equal to the others in equilibrium?
A) the real wage
B) the marginal rate of substitution between leisure and consumption
C) the marginal product of labor
D) the price of consumption

Answer 20

D) the price of consumption

Question 21

A Pareto optimum is a point that
A) a malevolent dictator would choose.
B) a cooperative coalition of some altruistic consumers would choose.
C) a cooperative coalition of some socially responsible firms would choose.
D) a social planner would choose.

Answer 21

Answer:

D a social planner would choose

Question 22

A Pareto optimum requires all of the following except  
A) MPN = -slope of PPF.  
B) MRSl,C = MRTl,C.  
C) MRTl,C = MPN.  
D) MPN = w.

Answer 22

D) MPN = w.

Question 23

Much of the writings of Adam Smith are in close agreement with

Answer 23

the first fundamental theorem of welfare economiocs

Question 24

The first fundamental theorem of welfare economics states that

Answer 24

under certain conditions, a competitive equilibrium is Pareto optimal.

Question 25

The second fundamental theorem of welfare economics states that

Answer 25

under certain conditions, a Pareto optimum is a competitive equilibrium.

Question 26

The concept of Pareto optimality is a A) utopian concept. B) useful concept because it guarantees economic equality. C) useful concept because it guarantees economic efficiency. D) useful concept that carefully balances a society's desires for equality and efficiency.

Answer 26

useful concept because it guarantees economic efficiency.

Question 27

``` A competitive equilibrium may fail to be Pareto optimal due to all of the following except A) inequality. B) externalities. C) distorting taxes. D) non-price-taking firms. ```

Answer 27

Answer: A inequality

Question 28

An externality is any activity for which an individual firm or consumer does not take into account all

Answer 28

associated costs and benefits.

Question 29

``` The presence of a distorting tax on wage income can result in A) MPN < MRTl,C. B) MRTl,C < MRSl,C. C) MPN < w. D) MRSl,C < MPN. ```

Answer 29

D) MRSl,C < MPN.

Question 30

Relative to the social optimum, monopoly power directly leads to

Answer 30

A) underproduction.

Question 31

An increase in government spending shifts the PPF

Answer 31

downward, but does not change its slope.

Question 32

The experience of the U.S. economy during World War II confirms the prediction that a dramatic increase in government spending is likely to

Answer 32

B) increase real GDP and decrease consumption.

Question 33

An increase in government spending A) increases consumption, increases hours worked, and increases the real wage. B) reduces consumption, increases hours worked, and increases the real wage. C) reduces consumption, increases hours worked, and reduces the real wage. D) reduces consumption, reduces hours worked, and reduces the real wage.

Answer 33

C) reduces consumption, increases hours worked, and reduces the real wage.

Question 34

An increase in government spending A) increases consumption and output. B) increases consumption, decreases output. C) decreases consumption, increases output. D) decreases consumption and output.

Answer 34

C) decreases consumption, increases output.

Question 35

Changes in government spending are not likely causes of business cycles because government spending induced business cycles would counterfactually predict

Answer 35

A) countercyclical real wages.

Question 36

Changes in government spending are not likely causes of business cycles because government spending induced business cycles would counterfactually predict

Answer 36

countercyclical consumption.

Question 37

``` Which feature of the business cycle does the one-period model replicate with shocks to government expenditures? A) procyclical employment B) procyclical consumption C) procyclical real wages D) countercyclical prices ```

Answer 37

A) procyclical employment

Question 38

An increase in total factor productivity shifts the PPF

Answer 38

upward, and also changes its slope.

Question 39

An increase in total factor productivity A) increases consumption, increases output, and increases the real wage. B) reduces consumption, increases output, and increases the real wage. C) reduces consumption, increases output and reduces the real wage. D) reduces consumption, reduces output, and reduces the real wage.

Answer 39

A) increases consumption, increases output, and increases the real wage.

Question 40

``` Which of the following is wrong with respect to an increase in total factor productivity? A) Households are better off. B) Consumption is up. C) The real wage is down. D) Output is up. ```

Answer 40

C) The real wage is down.

Question 41

Changes in total factor productivity are plausible causes of business cycles because productivity-induced business cycles correctly predict

Answer 41

B) real wages and consumption must be procyclical.

Question 42

Changes in total factor productivity are plausible causes of business cycles because

Answer 42

the model matches many stylized facts.

Question 43

In response to an increase in total factor productivity A) both the substitution effect and the income effect suggest that hours worked should increase. B) the substitution effect suggests that hours worked should increase, while the income effect suggests that hours worked should decrease. C) the substitution effect suggests that hours worked should decrease, while the income effect suggests that hours worked should increase.

Answer 43

the substitution effect suggests that hours worked should increase, while the income effect suggests that hours worked should decrease.

Question 44

``` Real business cycle theory argues that the primary cause of business cycles is fluctuations in A) preferences. B) government spending. C) the importance of externalities. D) total factor productivity. ```

Answer 44

D) total factor productivity.

Question 45

Just prior to the four most recent U.S. recessions, there has been a significant increase in

Answer 45

the relative price of energy

Question 46

If the government replaces a lump sum tax with a proportional labor income tax, then

Answer 46

) employment and output decrease.

Question 47

Proportional income taxation is distorting because

Answer 47

B) the competitive equilibrium is not Pareto optimal.

Question 48

With a linear production function in labor only, which of the following must be true? A) The representative household works as much as possible. B) The representative firm makes large profits. C) The real wage equals total factor productivity.

Answer 48

C) The real wage equals total factor productivity.

Question 49

At the competitive equilibrium with a positive proportional labor income tax A) the real wage after tax exceeds the marginal product of labor. B) the real wage after tax equals the marginal product of labor. C) the real wage after tax is lower than the marginal product of labor.

Answer 49

C) the real wage after tax is lower than the marginal product of labor.

Question 50

``` How does an increase in the proportional labor income tax modify the budget constraint? A) a parallel move up B) a parallel move down C) a tilting up D) a tilting down ```

Answer 50

D) | a tilting down