Economics 102Midterm #2Spring 2006Binary Choice1) Holding everything else constant, if the level of technology increases, then according to the classical model, average income will increase.a. Trueb. False2) Economists only care about short-run growth, because “in the long run we are all dead.”a. Trueb. False3) According to the quantity theory of money, an increase in the money supply, holding all other factors constant, will increase real GDP.a. Trueb. False4) Holding everything else constant, in the simple Keynesian Model presented in class, when aggregate expenditure is greater than production, this reduces the level of inventories and in the short-run results in an increase in the aggregate price level. a. Trueb. False5) A government budget surplus will shift:a. the supply curve of loanable funds.b. the demand curve for loanable funds.6) According to the Classical Dichotomy, the Classical Model is only valid for determining the nominal values of economic variables.a. True.b. False.7) Which of the following statements best describes the differences between the Classical and Keynesian models presented in class?a. When the economy is in the midst of an economic recession, the Keynesian economist typically will advocate governmental intervention while the Classical economist will advocate patience.b. According to the Classical Model, economic fluctuations are due to a disequilibrium in the labor market; in the simple Keynesian Model, when aggregate expenditure is greater than actual production, prices rise to eliminate this disequilibrium.8) Deliberate actions by policy makers that cause fiscal policy to be expansionary when the economy contracts are called automatic stabilizers.a. True b. False9) When an economy is in a recession, the benefit from hiring an additional worker is less than the opportunity cost of working.a. True b. FalseMultiple Choice 10) Consider an economy using the Keynesian model as presented in class. The value of the autonomous expenditure multiplier [1/(1-b)] in this economy is 2. If government spending increases by $50 while taxes simultaneously increase by $50, what will happen to the equilibrium level of GDP?a. It will not effectively change the level of output since the increase in government spending which stimulates spending is exactly offset by the increase in taxes which contracts spending.b. It will cause the equilibrium level of GDP to increase by less than $50 because of the multiplier effect.c. It will cause the equilibrium level of GDP to increase by more than $50 because of the multiplier effect.d. It will cause the equilibrium level of GDP to increase by exactly $50 due to the multiplier effect.11) The country of Madison has the following production function: Y = 2L1/2 (that is, Y equals two times the square root of L) where Y refers to total output or GDP and L refers to labor. Madison also has the following labor supply: L = 2W+3. Madison just received new technology from its neighbor. Holding everything else constant, which of the following is true about the new production function and labor supply equation?a. Both the labor supply equation and the production function will change.b. Only the labor supply equation will change.c. Only the production function will change.d. Neither the labor supply equation nor the production function will change.Use the following graph to answer the next two questions. Note that the line drawn in the graph refers to the aggregate production function. This aggregate production function is drawn with a fixed amount of labor and a fixed amount of technology. The economy pictured in the graph currently has K* amount of capital available to use for producing goods and services. 12) Which point is most likely if there is an increase in the amount of labor hired in the economyand nothing else changes?a. Ab. Bc. Cd. D13) What will happen to the productivity of capital if there is an increase in the size of the labor force?a. Productivity will increase.b. Productivity will fall.c. Productivity will not be affected.d. It is impossible to tell.14) Imagine that the government has eliminated a tax on capital investments. How will this affect the economy?a. Labor productivity will increase and long run growth will fall.b. Labor productivity will fall and long run growth will increase.c. Labor productivity and long run growth will both fall.d. Labor productivity and long run growth will both increase.Use the following Classical Model to answer the next two questions:Y = C + SP + T – TRSG = T – TR – GNS = SP + SGNS = Y – C – GKI = M – XY = C + I + G + (X – M)In equilibrium, leakages = injectionsFurthermore, suppose the government runs a balanced budget (that is, G – T + TR = 0) and collects $300 in tax revenue. Firms spend $55 on new capital and capital inflow equals $15. Income equals $450 and $220 of that income is spent on consumption. Furthermore, leakages equal injections in this economy.15) What is the level of private saving in this economy?a. $55 since private saving must equal investment in order for the loanable funds market to be in equilibrium.b. $70 since businesses are spending $55 of their own money plus $15 provided via the foreign sector (i.e., the capital inflow).c. $40 since businesses are demanding $55 worth of loanable funds and the foreign sectoris supplying only $15 worth of loanable funds.d. $25 since the total demand for loanable funds is $40 and there are $15 of loanable funds being supplied through the capital inflow.16) What is the level of government transfers in this economy?a. $0b. $90c. $110d. $12517) According to the Classical Model, which of the following will most likely contribute to long-run growth?a. An increase in payments to the unemployed.b. Increased restrictions on immigration.c. Improved birth control methods.d. A reduction in the capital gains tax.18) Answer this question according to the Classical Model. The US runs a trade deficit with China. Holding everything else constant, if the US narrows this gap by increasing exports, what will happen to the level of investment in the United States?a. Investment in the U.S. will increase relative to its initial level.b. Investment in the U.S. will decrease relative to its initial level.c. Investment in the U.S. could either increase or decrease relative to its initial level.d. There will be no effect on investment in the U.S.19) Which statement about economic fluctuations is true?a. In a recession, the
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