Deck 5: A Closed-Economy One-Period Macroeconomic Model

Question 1

The Laffer Curve illustrates the relationship between

A)tax revenue and income tax rates.
B)the income effect and the substitution effect.
C)total factor productivity and wage rates.
D)consumption and taxes.
E)investment and interest rates.

Answer 1

A

Question 2

Goods and services provided by the government are called

A)national goods.
B)social goods.
C)public goods.
D)free goods.
E)government goods.

Answer 2

C

Question 3

In the model with Keynesian sticky wages and prices

A)The first welfare theorem holds.
B)The marginal product of labour may not be equal to the marginal rate of substitution of leisure for consumption.
C)Supply equals demand in every market.
D)The representative firm is not optimizing.
E)The representative consumer is choosing labour supply optimally given the market real wage.

Answer 3

B

Question 4

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

A)a parochial economy.
B)a closed economy.
C)an isolated economy.
D)an interdependent economy.
E)a rogue nation.

Question 5

Question 6

Making use of an economic model is a process of

A)running experiments to determine how changes in the endogenous variables will change the exogenous variables.
B)resolving inconsistencies in the actions of economic agents.
C)running experiments to determine how changes in the exogenous variables will change the endogenous variables.
D)determining how a closed economy is linked to an open economy.
E)solving hundreds of simultaneous equations.

Question 7

Question 8

Points on the production possibilities frontier have the property that they

A)show the maximum amount of goods that can be consumed in a competitive equilibrium.
B)show the maximum amount of goods that can be consumed for given amounts of government spending.
C)are inherently unattainable.
D)show the maximum amount of leisure that can be consumed for given amounts of hours worked.
E)show the maximum amount of leisure that can be consumed for given amounts of goods consumed.

Question 9

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

A)associated costs and benefits.
B)of the ramifications of its actions on others.
C)negative impacts on the economy.
D)associated costs.
E)associated benefits.

Question 10

A Pareto optimum is a point that

A)a social planner would choose.
B)a malevolent dictator would choose.
C)is experienced at competitive equilibrium.
D)a cooperative coalition of some altruistic consumers would choose.
E)a cooperative coalition of some socially responsible firms would choose.

Question 11

Intertemporal substitution of labour suggests that

A)in the short run, the substitution effect of an increase in the real wage does not outweigh the income effect.
B)the substitution effect of a permanent increase in the real wages is equal to the substitution effect of a temporary change in the real wage.
C)the substitution effect of a permanent increase in the real wages is larger than the substitution effect of a temporary change in the real wage.
D)hours worked are not affected by changes in real wages.
E)the substitution effect of a permanent increase in the real wages is smaller than the substitution effect of a temporary change in the real wage.

Question 12

The real wage is determined by

A)-(slope of PPF).
B)the marginal rate of transformation.
C)+(slope of indifference curve).
D)the marginal product of capital.
E)the competitive equilibrium.

Question 13

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

A)no one can be made worse off.
B)someone can be made better off without making everyone else worse off.
C)anyone can be made better off.
D)someone can be made better off without making someone else worse off.
E)everyone is made better off.

Question 14

The substitution effect that results from a decrease in total factor productivity

A)substitutes lump sum taxes for taxes on firms.
B)is the substitution of consumption for leisure.
C)involves substitution of government spending for consumption.
D)is zero.
E)is a shift from the labour input to the capital input.

Question 15

According to the Laffer Curve

A)higher tax rates always lead to more tax revenue.
B)higher tax rates always lead to less tax revenue.
C)lower tax rates always lead to higher tax revenue.
D)there may exist two tax rates that deliver the same level of tax revenue.
E)there is a unique tax rate for each level of revenue.

Question 16

The first fundamental theorem of welfare economics states that

A)under certain conditions, a competitive equilibrium is Pareto-optimal.
B)under certain conditions, a Pareto optimum is a competitive equilibrium.
C)a competitive equilibrium is always Pareto-optimal.
D)a Pareto optimum does not have to be a competitive equilibrium.
E)a Pareto optimum is always a competitive equilibrium.

Question 17

The government spending multiplier is

A)the ratio of the increase in output to the increase in government spending.
B)the ratio of the increase in consumption to the increase in government spending.
C)the ratio of the decrease in government spending to the increase in consumption.
D)the ratio of the increase in consumption to the increase in output.
E)the ratio of the increase in government spending to the increase in output.

Question 18

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

A)the first fundamental theorem of welfare economics.
B)where competitive equilibrium is.
C)the necessity of trade restrictions.
D)the relationship between the production function and the PPF.
E)the second theorem of welfare economics.

Question 19

The concept of Pareto optimality is a

A)useful concept that carefully balances a society's desires for equality and efficiency.
B)useful concept because it guarantees economic equality.
C)useful concept because it guarantees economic equity.
D)useful concept because it guarantees economic efficiency.
E)utopian concept.

Question 20

In an economic model, an endogenous variable is

A)a stand-in for more complicated variables.
B)closely linked to a closed economy.
C)determined outside the model.
D)determined by the model itself.
E)a variable that has no effect on the workings of the model.

Question 21

Government spending in the one-period model acts to

A)make consumers less productive.
B)shift out the production possibilities frontier.
C)decrease hours of work.
D)reduce consumption.
E)reduce investment.

Question 22

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

A)real wages and consumption must be procyclical.
B)consumption and total factor productivity must be procyclical.
C)total hours worked and consumption must be procyclical.
D)real wages and total hours must be procyclical.
E)consumption and government spending must be procyclical.

Question 23

In an economic model, government spending is assumed to be

A)not included in a closed economy.
B)only an public goods.
C)exogenous.
D)not included in an open economy.
E)endogenous.

Question 24

The marginal rate of transformation is

A)is equal to the wage rate * TFP.
B)equivalent to the marginal rates of substitution.
C)the rate at which hours worked can be converted into an economy's capital stock.
D)is derived from the marginal product of labour.
E)- (slope of the PPF).

Question 25

A Pareto optimum

A)is the slope of the PPF.
B)is where the consumption line is tangent to the PPF.
C)can be found in a closed and open economy.
D)is found where the budget line is tangent to the indifference curve.
E)is the same as a competitive equilibrium.

Question 26

In the production function, output is given by

A)consumption and taxes.
B)capital stock and leisure.
C)capital stock and employment.
D)consumption and government spending.
E)production technology and the capital stock.

Question 27

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 decrease, while the income effect suggests that hours worked should increase.
C)the substitution effect suggests that hours worked should increase, while the income effect suggests that hours worked should decrease.
D)the net effect is a reduction in the welfare of the representative consumer.
E)both the substitution effect and the income effect suggest that hours worked should decrease.

Question 28

An increase in total factor productivity involves

A)more government spending.
B)a reduced real wage.
C)an increase in the capital stock.
D)a better technology for converting factor inputs into aggregate output.
E)a more educated workforce.

Question 29

A competitive equilibrium may fail to be Pareto-optimal due to

A)government intervention.
B)social efficiency.
C)inequality.
D)externalities.
E)profit maximizing firms.

Question 30

In a one-period model, government is likely to run

A)a surplus but not a deficit.
B)on a fiscal year basis.
C)either a surplus or a deficit.
D)neither a surplus nor a deficit.
E)a deficit but not a surplus.

Question 31

In an economic model

A)endogenous variables determine exogenous variables.
B)exogenous variables determine endogenous variables.
C)the government budget constraint determines exogenous variables.
D)endogenous and exogenous variables are determined simultaneously.
E)fiscal policy determines endogenous variables.

Question 32

Examples of exogenous variables include

A)labour supply and labour demand.
B)consumption, government spending and capital stock.
C)government spending, total factor productivity, and capital stock.
D)real wages, aggregate output, and labour demand.
E)real wages, consumption, and taxes.

Question 33

An increase in total factor productivity shifts the production function

A)downward and increases the marginal product of labour.
B)upward and reduces the marginal product of labour.
C)downward and reduces the marginal product of labour.
D)upwards and increases the marginal product of labour.
E)downward and also reduces its slope.

Question 34

A decrease in total factor productivity could be caused by

A)better organization of production.
B)higher taxes.
C)technological innovation.
D)consumer supplying less hours of work.
E)an increase in regulation.

Question 35

An example of a negative externality is

A)a chemical factory producing fertilizers that kills plants, rather than help them as advertised.
B)a chemical factory that conducts research into the safe disposal if chemicals.
C)a chemical factory dumping waste in a river upstream from a popular fishing spot.
D)a chemical factory producing fertilizers that do not, in fact, help plants grow.
E)a chemical factory that enters a town and bids up wages, and, therefore, increases the cost of other firms.

Question 36

An economy that engages in international trade is called

A)a modern economy.
B)a cooperative economy.
C)an independent economy.
D)an engaged economy.
E)an open economy.

Question 37

Real business cycle theory argues that the primary cause of business cycles is fluctuations in

A)government spending.
B)the importance of externalities.
C)total factor productivity.
D)preferences.
E)monetary shocks.

Question 38

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

A)= taxes + borrowing.
B)> 0.
C)= taxes.
D)= taxes + transfers.
E)taxes + transfers + borrowing.

Question 39

An increase in government spending shifts the PPF

A)upward, and also changes its slope.
B)downward, and also changes its slope.
C)downward and also the marginal rate of transformation.
D)upward, but does not change its slope.
E)downward, but does not change its slope.

Question 40

In the long run in the model with Keynesian sticky wages and prices

A)the representative consumer is working too much.
B)the First Welfare Theorem holds.
C)the First Welfare Theorem does not hold.
D)the representative consumer is working too little.
E)the representative firm is hiring too much labour.

Question 41

In an economic model, an exogenous variable is

A)closely linked to a closed economy.
B)determined outside the model.
C)determined by the model itself.
D)a stand-in for more complicated variables.
E)a variable that has no effect on the workings of the model.

Question 42

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

A)production function.
B)utility possibilities frontier.
C)competitive equilibrium.
D)budget constraint.
E)production possibilities frontier.

Question 43

Fiscal policy refers to a government's choices over its

A)expenditures, taxes, issuance of money, and borrowing.
B)expenditures, foreign affairs, issuance of money, and borrowing.
C)expenditures, taxes, transfers, and borrowing.
D)changing the money supply, defense, and borrowing.
E)issuance of money, taxes, environmental regulations, and foreign affairs.

Question 44

In the model with Keynesian sticky wages and prices, a decrease in government spending may decrease output more than one-for-one because

A)the decrease in government spending may worsen inefficiency.
B)more government spending is always desirable.
C)the First Welfare Theorem holds.
D)government spending changes the behaviour of the monetary authority.
E)consumption increases.

Question 45

In the model with Keynesian sticky wages and prices, if the representative consumer is working too much given the market real wage, then

A)The monetary authority should take actions that will reduce the price level.
B)The monetary authority should take actions that will increase the price level.
C)The competitive equilibrium is Pareto optimal.
D)The representative firm should be taxed.
E)The representative consumer should change his or her preferences.

Question 46

An increase in total factor productivity shifts the production function

A)downward, and also changes its slope.
B)upward, but does not change its slope.
C)downward, but does not change its slope.
D)upward, and also changes its slope.
E)upward, but reduces the marginal product of labour.

Question 47

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

A)procyclical real wages.
B)countercyclical employment.
C)countercyclical consumption.
D)procyclical employment.
E)countercyclical real wages.

Question 48

The second fundamental theorem of welfare economics states that

A)a Pareto optimum is always a competitive equilibrium.
B)under certain conditions, a competitive equilibrium is Pareto-optimal.
C)under certain conditions, a Pareto optimum is a competitive equilibrium.
D)a competitive equilibrium is always Pareto-optimal.
E)a Pareto optimum does not have to be a competitive equilibrium.

Question 49

The marginal rate of transformation is equal to

A)marginal rate of substitution of leisure.
B)the real wage rate divided by total factor productivity.
C)marginal product of labour.
D)marginal rate of substitution for capital.
E)marginal product of capital.

Question 50

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

A)behavioural relationship between consumption and leisure.
B)technological relationship between consumption and the capital stock.
C)behavioural relationship between consumption and government spending.
D)technological relationship between consumption and leisure.
E)technological relationship between consumption and government spending.

Question 51

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

A)the marginal rate of transformation.
B)the marginal rate of substitution.
C)the marginal product of labour.
D)the marginal product of capital.
E)rate of conversion.

Question 52

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

A)countercyclical employment.
B)countercyclical consumption.
C)procyclical consumption.
D)countercyclical real wages.
E)procyclical employment.

Question 53

An example of a public good is

A)transfer payments.
B)national defence.
C)government pension payments.
D)both A and C.
E)lump sum taxes.

Question 54

Immunization from communicable diseases generate

A)the provision of public goods.
B)positive externalities.
C)overproduction.
D)a Pareto optimum.
E)negative externalities.

Question 55

An increase in total factor productivity

A)increases consumption, reduces output, and increases the real wage.
B)reduces consumption, reduces output, and reduces the real wage.
C)increases consumption, increases output, and increases the real wage.
D)reduces consumption, increases output, and increases the real wage.
E)reduces consumption, increases output and reduces the real wage.

Question 56

A competitive equilibrium is a state of affairs in which

A)markets clear, and output is maximized.
B)agents are price-takers, and markets clear.
C)all agents are equally well-off and agents are price-takers.
D)output and total factor productivity are maximized.
E)output is maximized, and all agents are equally well-off.

Question 57

In the one-period competitive model we have been studying

A)both consumption and total factor productivity are endogenous.
B)consumption and taxes are exogenous.
C)consumption is exogenous and total factor productivity is endogenous.
D)both consumption and total factor productivity are exogenous.
E)consumption is endogenous and total factor productivity is exogenous.

Question 58

The presence of a distorting tax on wage income can result in

A)MPN < MRTL,C.
B)MRTL,C < MRSL,C.
C)MRSL,C < MPN.
D)MPn < w.
E)MRSL,C = MPN.

Question 59

Relative to the social optimum, monopoly power directly leads to

A)underproduction.
B)too much leisure.
C)social efficiency.
D)too little leisure.
E)overproduction.

Question 60

An increase in government spending

A)reduces consumption, increases hours worked, and reduces the real wage.
B)reduces consumption, increases hours worked, and increases the real wage.
C)increases consumption, reduces hours worked, and increases the real wage.
D)increases consumption, increases hours worked, and increases the real wage.
E)reduces consumption, reduces hours worked, and reduces the real wage.

Question 61

No questions were provided for this section.

Question 62

In the basic one-period model in Chapter 5, government spending is modelled as the acquisition of goods by
the government, with the government simply throwing the goods away. Is this an accurate way to capture
what the government does? If so, in what ways? If not, in what ways could we alter the model to make it
capture the role of the government more accurately?

Question 63

What are three reasons for a competitive equilibrium not being Pareto-optimal? What two questions arise
from these inefficiencies?