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

Question 1

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

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

Answer 1

technological relationship between consumption and leisure.

Question 2

An example of a public good is

A) national defence
B) transfer payments
C) government pension payments
D) both A) and C)

Answer 2

national defence

Question 3

In the production function,output is given by

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

Answer 3

capital stock and employment.

Question 4

An economy that engages in international trade is called

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

Question 5

In the one-period competitive model we have been studying,

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

Question 6

Points on the production possibilities frontier have the property that they

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

Question 7

A competitive equilibrium is a state of affairs in which

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

Question 8

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

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

Question 9

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

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

Question 10

In an economic model,an exogenous variable is

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

Question 11

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

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

Question 12

Making use of an economic model is a process of

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

Question 13

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) rate of conversion.
E) the marginal product of capital.

Question 14

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) fiscal policy determines endogenous variables.
E) endogenous and exogenous variables are determined simultaneously.

Question 15

Goods and services provided by the government are called

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

Question 16

Examples of exogenous variables include

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

Question 17

Fiscal policy refers to a government's choices over its

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

Question 18

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

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

Question 19

In an economic model,government spending is assumed to be

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

Question 20

In an economic model,an endogenous variable is

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

Question 21

The second fundamental theorem of welfare economics states that

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

Question 22

An example of a negative externality is

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

Question 23

A competitive equilibrium has the following property:

A)
B)
C)
D)
E)

Question 24

The marginal rate of transformation is

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

Question 25

The real wage is determined by

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

Question 26

The first fundamental theorem of welfare economics states that

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

Question 27

Relative to the social optimum,monopoly power directly leads to

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

Question 28

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

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

Question 29

Immunization from communicable diseases generate

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

Question 30

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.
E) useful concept because it guarantees economic equity.

Question 31

A Pareto optimum

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

Question 32

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

A)
B)
C)
D)
E)

Question 33

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.
E) is experienced at competitive equilibrium.

Question 34

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

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

Question 35

A competitive equilibrium may fail to be Pareto optimal due to

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

Question 36

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

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

Question 37

An increase in government spending shifts the PPF

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

Question 38

The marginal rate of transformation is equal to

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

Question 39

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

Question 40

A Pareto optimum requires

A)
B)
C)
D)
E)

Question 41

According to our model,increasing G during a recession,as the CEAP did,

A) makes the economy worse off, since the equilibrium allocation of resources is Pareto optimal
B) will help the economy recover and increase economic welfare
C) will increase consumption spending by consumers according to the multiplier effect
D) has no effect
E) had a multiplier much greater than one

Question 42

An increase in total factor productivity shifts the production function

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

Question 43

An increase in total factor productivity shifts the production function

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

Question 44

The Solow residual attempts to measure changes in

A) the impact of government spending on aggregate output.
B) total factor productivity.
C) changes in preferences for consumption versus leisure.
D) output produced above and beyond wage and dividend income.
E) changes in preferences for work versus leisure.

Question 45

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

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

Question 46

Intertemporal substitution of labour suggests that

A) 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.
B) 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.
C) 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.
D) hours worked are not affected by changes in real wages.
E) in the short run, the substitution effect of an increase in the real wage does not outweigh the income effect.

Question 47

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

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

Question 48

According to the Laffer Curve

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

Question 49

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

Question 50

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.
E) monetary shocks.

Question 51

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.
E) increases consumption, reduces output, and increases the real wage.

Question 52

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

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

Question 53

The widening productivity gap between Canada and the United States is largely explained by

A) superior technological innovation in the United States.
B) high oil prices in the 1980s.
C) growth in Canada was concentrated in low-productivity sectors.
D) higher taxes in Canada.
E) government policy.

Question 54

An increase in total factor productivity involves

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

Question 55

The Laffer Curve illustrates the relationship between

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

Question 56

In the model where G = qt,when q increaes,the substitution effect

A) reduces C and increases G.
B) reduces both C and G.
C) decreases G and increases C.
D) increases both C and G.
E) increases C and decreases G.

Question 57

To choose the optimal level of government expenditures,G*,the government

A) must know the preferences of all consumers over private and public goods
B) needs only to balance the budget as any level of G is Pareto optimal
C) minimize the tax burden
D) must know the preferenes of all consumers and mimimize the tax burden.
E) obtain the correct balance between military spending and social programs.

Question 58

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

A) increase both real GDP and consumption.
B) increase real GDP and decrease consumption.
C) decrease real GDP and increase consumption.
D) decrease both real GDP and consumption.
E) increase real GDP, while keeping consumption constant.

Question 59

In the model where G = qT,when q increases,the income effect

A) increases both C and G.
B) decreases G and increases C.
C) reduces C and increases G.
D) reduces both C and G.
E) increases C and decreases G.

Question 60

In the model where q,when q increases,government spending,if choosen optimally,should

A) increase.
B) decrease.
C) stay the same.
D) decrease at the same rate as taxes.
E) decrease faster than taxes.

Question 61

When we adjust the model to include consumer preferences over both C and G,the government can optimally choose government spending.Explain some of the difficulties the government may encounter in trying to determine G*.Specifically,compare this problem with the one the market solves in competitive equilibrium in the original model where G is fixed exogenously.

Question 62

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