Term
Nominal GDP is a collection of: 

Definition


Term

Definition
changes in unemployment rate and GDP 


Term
If MPC (marginal propensity to consume) is .75 and taxes decrease by 400, 

Definition
output increases by 1,600. e.g. 400/(1.75) 


Term
The multiplier is smaller when 

Definition
there's a decrease in marginal propensity to consume (MPC) 


Term
Increase in business confidence, 

Definition
expenditure goes up, increase in output 


Term
When inventories have unintended decrease, firms will 

Definition
increase production, increase output 


Term
The money demand curve shows 

Definition
relationship between quantity of money and interest rate. Is downward sloping.
Demand = (Price level)*(Output)/(Velocity of money) 


Term
When interest rate increases 

Definition
opportunity cost of holding money goes up, less money is held 


Term
People hold more money when nominal income increases which causes 

Definition
dollar value of transactions to go up 


Term
Money demand curve shifts when 

Definition


Term
People hold money during price increases because 

Definition
it takes more money to buy the same amount of goods 


Term
In the money demandmoney supply model, an increase in money supply 

Definition


Term
In the money demandmoney supply model, an increase in income 

Definition
increases the interest rate 


Term
In the money demandmoney supply model, a reduction in income 

Definition
increases bond prices and reduction in interest rate 


Term
In the money demandmoney supply model, an increase in price level 

Definition
increases the interest rate 


Term
If the money market is out of equilibrium because demand is higher than supply 

Definition
people will sell financial assets to increase money holds, the price of financial assets will fall, and interest rate will increase to restore equilibrium 


Term

Definition
M = (multiplier)(C + R)
C + R = high powered money 


Term
High powered money equals 

Definition


Term
A reduction in the reserve ratio will cause 

Definition
an increase in the money multiplier 


Term
Assume C = 0, if the reserve ratio is 0.1, 

Definition
the simple money multiplier is 10 


Term
When banks increase quantity of excess reserves, the money multiplier 

Definition


Term
Which would occur if central bank conducts an open market purchase of bonds 

Definition
an increase in the money supply 


Term

Definition
change the money supply by changing monetary base.
i.e. quantity of high powered money 


Term
If the reserve ratio is 0.2, currency holdings are 0, the FED makes a $10,000 purchase of bonds, the money supply changes by 

Definition


Term
Which of the following occurs when central bank pursues expansionary monetary policy 

Definition
Central bank buys bonds, decreasing the interest rate 


Term
When the federal open market committee meets, it sets 

Definition
target value for federal funds rate 


Term
Which will cause an increase in the amount of money people want to hold? 

Definition
reduction of interest rate 


Term

Definition
money demand curve shifts out 


Term
A fall in the interest rate 

Definition
will increase bond prices 


Term
At current interest rate, suppose the supply of money is less than the demand 

Definition
the price of bonds will fall 


Term
Assume C = 0, if the reserve ratio is 0.4, the simple money multiplier is 

Definition


Term
Money multiplier decreases when 

Definition
banks hold more excess reserves 


Term
If reserve ratio if 0.25, C = 0, and the Fed makes a $5,000 purchase of bonds, the money supply 

Definition


Term
Investment is inversely related to interest rate when 

Definition
interest rate increases, expected profit goes down 


Term

Definition
illustrates the combinations of interest (i) and income (Y) that maintain equilibrium in the goods market 


Term
IS curve is negatively sloped because 

Definition
decrease in interest rate means investment increase, driving output higher 


Term
The expenditure multiplier is 

Definition
1/(1MPC) or 1/MPS, assuming no taxes 


Term

Definition


Term

Definition


Term
Increase in autonomous consumption will 

Definition


Term
Increase in autonomous investment will 

Definition


Term
A fall in consumer confidence will 

Definition


Term
Increase in business confidence will 

Definition


Term

Definition
multiplier falls, IS curve steeper 


Term
An increase in responsiveness to interest rate changes reflects 

Definition


Term
Investment spending is not sensitive to interest if 

Definition
the IS curve is relatively steep 


Term
Which is not a component of the M1 definition of money 

Definition


Term

Definition
sets of interest (i) and income (Y)that maintain equilibrium 


Term
Intuition for positive slope of the LM curve is that 

Definition
income increases, money demand goes up causing the interest rate to increase 


Term

Definition


Term
Slope of the LM curve is vertical when 

Definition
money demand does not depend on the interest rate 


Term
When money supply goes up 

Definition


Term
When the Fed purchases Treasury bills 

Definition


Term
An increase in price level 

Definition


Term
Suppose the economy operates on the LM curve but not the IS curve, this means that 

Definition
the money/bond market at equilibrium but the goods market is not 


Term
In the ISLM model, an increase in government spending 

Definition
increases income and the interest rate 


Term
In the ISLM model, an increase in taxes 

Definition
decreases income and decreases interest rate 


Term
Equal and simultaneous reduction of G(government spending) and T (taxes) cause 

Definition


Term
In the ISLM model, an increase in business confidence 

Definition
increases income and increases interest rate 


Term
In the ISLM model, an increase in business confidence causes 

Definition
outward shift in the IS curve 


Term
In the ISLM model, an increase in consumer confidence 

Definition
increases income and increases interest rate 


Term
In the ISLM model, an increase in money supply 

Definition
increases output and decreases interest rate 


Term
In the ISLM model, a reduction in the aggregate price level causes 

Definition
outward shift in LM curve and reduction in interest rate 


Term
If the government engages in simultaneous fiscal, monetary expansion, we know that 

Definition


Term
If the Fed purchases bonds, with a simultaneous tax increase, there will be a 

Definition
reduction in i (interest rate) 


Term
If the responsiveness of investment to the interest rate goes up, 

Definition
fiscal policy is less effective, monetary policy more effective 


Term
The responsiveness of investment to the interest rate 

Definition
is larger near full employment and smaller in recessions 


Term
Changes in the interest rate have a larger effect on investment when 

Definition
the economy is near full employment 


Term
If the population is 5,000, number unemployed is 200, unemployment rate is 5%, the labor force participation rate is: 

Definition
80 percent
200/x = .05 > 200/4,000 = .05 > 4,000/5,000 = .8 


Term
Which of the following represents the labor force participation rate 

Definition
the ratio of labor force to the civilian noninstitutional population 


Term
suppose the population is 200, number employed is 135, unemployment rate is 10 percent. The number unemployed is 

Definition


Term
Suppose the population is 1,000, number employed is 45, unemployment rate is 5 percent. Employment to population ratio is 

Definition


Term
Bargaining power of workers increases when 

Definition
unemployment compensation improves 


Term

Definition
used by firms to increase productivity and decrease turnover 


Term
Efficiency wage theory suggests 

Definition
productivity might drop if wages decrease 


Term
In the wage setting equation, 

Definition
Wage = (Expected price level)(function(unemployment, other factors)
W = PeF(u,z) 


Term
In the wage setting equation, z does not include which of the following 

Definition
extent to which firms mark up prices over marginal cost 


Term
In the wagesetting equation, nominal wage tends to decrease when: 

Definition
unemployment benefits decrease 


Term
In price setting equation, P=(1+m)W, m is 

Definition
markup over marginal cost due to monopoly power and is zero under pure competition 


Term

Definition
a downward shift in the PS curve 


Term
In the WSPS diagram, anything that increases z (bargaining power) 

Definition
shifts WS equation upward 


Term
In the WSPS diagram, anything that increases z (bargaining power) 

Definition
increase natural rate of unemployment and leaves real wage unchanged 


Term
In WSPS, a decrease in m (mark up over marginal cost due to monopoly power) 

Definition
shifts the PS equation upward 


Term
In WSPS, a decrease in m (mark up over marginal cost due to monopoly power) will cause 

Definition
decreases unemployment rate and raises real wage 


Term
In WSPS, a reduction in the mark up will cause 

Definition
increases the equilibrium real wage 


Term
In WSPS, an increase in the minimum wage will cause 

Definition
no change in the equilibrium real wage 


Term
In WSPS, a simultaneous decrease in markup and improvement in unemployment compensation causes 

Definition
increase in real wage and uncertain effect on unemployment 


Term
Assume production function is Y = N and Pe = P, we know increased minimum wage will cause 

Definition
reduction in natural level of output 


Term
Reservation wage refers to 

Definition
wage that makes workers indifferent between work and leisure 


Term
Discouraged workers would 

Definition
take a job if offered, but gave up looking 


Term
Natural level of output is the level of output that occurs when 

Definition
the economy operates at an unemployment rate consistent with WS and PS equation 


Term
Suppose we wish to examine determinants of equilibrium wage and equilibrium level of employment (N). Real wage is on the vertical axis, level of employment is on the horizontal axis. WS relation will now be 

Definition


Term
In WSPS, simultaneous increase in markup and decrease in unionization causes 

Definition
decrease in real wage and uncertain effect on unemployment 


Term
Original Phillips curve based on British data was relation between 

Definition
wage growth and unemployment 


Term
Now, Phillips curve based on US data to show the relation between 

Definition
inflation and unemployment 


Term
Phillips curve derived from 

Definition


Term
In the Phillips curve equation, increase in expected inflation increases actual inflation because 

Definition
wage earners demand higher wages, prices raise to cover that, inflation goes up 


Term
In the Phillips curve equation, an increase in current inflation causes 

Definition
increase in wage bargaining power 


Term
Prior to 1970s, it was reasonable to expect 

Definition


Term
Original Phillips curve with inflation and unemployment 

Definition
expected inflation was assumed 0 


Term
Which of the following explains why the original Phillips curve ‘broke down’ 

Definition
individuals changed the way they formed inflation expectations 


Term
Assume individuals form expectations according to pi(t) = theta*pi(t1). Value of theta was 

Definition
zero until 1970s, then increased steadily to one 


Term
Assume that expected inflation is based on the following: pi(t) = theta*pi(t1). If theta =1, we know 

Definition
there are low rates of unemployment. Will cause steadily increasing rates of inflation 


Term
Suppose the Phillips curve is represented by: pi(t)  pi(t1) = 20  2u(t). Given this, which is most likely to occur if actual unemployment = 6? 

Definition
Rate of inflation will tend to increase 


Term
Assume expected rate of inflation equals last year’s inflations and unemployment rate has been greater than natural rate of unemployment. We know that 

Definition
rate of inflation should steadily decrease 


Term
Which of the following will not cause an increase in natural rate of unemployment? 

Definition
Increase in expected rate of inflation 


Term
Assume the phillips curve equation is represented by pi(t)  pi(t1) = (m + z)  au(t). Given this, natural rate of unemployment will be 

Definition


Term
Assume the Phillips curve equation is represented by pi(t)  pi(t1) = (m + z)  au(t). Which will cause reduction in natural unemployment rate? 

Definition


Term
Assume the phillips curve equation is represented by pi(t)  pi(t1) = (m + z)  au(t). Which will cause an increase in natural rate of unemp? 

Definition


Term
Which of the following is not a reason for change in natural unemp rate over time? 

Definition
Changes in government spending 


Term
Suppose the phillips curve is represented by: pi(t)  pi(t1) = 15  3u(t). Given this, the natural unemp rate in this economy is 

Definition


Term
In late 1970s, disagreement about costs of fighting inflation 

Definition
those who argued it would be costly were correct 


Term
In late 1970s, those who argued it would not be costly argued 

Definition
inflation expectations would quickly adjust and rise in unemp would be small 


Term
In late 1970s, those who argued it would be costly argued 

Definition


Term
When a nominal wage is indexed, the nominal wage is usually automatically adjusted based on movements in 

Definition


Term
As proportion of labor contracts that index wages to prices decreases 

Definition
inflation would be less sensitive to changes in unemployment 


Term
During great recession, Phillips curve broke down 

Definition
when inflation did not fall as much as predicted by nominal wage rigidity 


Term
Reduction in unemployment rate causes 

Definition
increase in inflation over time 


Term
The most often measure of changing living standards is 

Definition
growth rate of real GDP per capita 


Term
Accurate comparison of living standards using data from US and Arabia 

Definition
purchasing power parity method 


Term
Current exchange rate method to purchasing power parity method, India’s standard of living 

Definition
rises, but still far below US 


Term
Main conclusion about growth for OECD countries and four rich countries 

Definition
large increase in standard of living since 1950 


Term
Convergence occurring among OECD countries because 

Definition
poorer countries have higher growth rates than the richer ones 


Term
Assume decreasing returns to capital, decreasing returns to labor, constant returns to scale. Labor and capital decrease by 5 percent. 

Definition
Output y decreases by 5 percent 


Term
Assume constant returns to scale and n, k decrease by 3 percent, we know 

Definition
output decrease 3 percent 


Term
If there are decreasing returns to scale, when capital and labor increase 

Definition


Term
Assume decreasing returns to capital, decreasing returns to labor, constant returns to scale. Reduction in capital stock causes 

Definition


Term
Assume decreasing returns to capital, decreasing returns to labor, constant returns to scale. Reduction in labor will 

Definition


Term
Assume decreasing returns to capital, decreasing returns to labor, constant returns to scale. Successive and equal increases in capital per worker cause 

Definition
output per worker increase at constant rate 


Term
Two sources of growth in standard of living 

Definition
improvement in technology and capital labor ratio 


Term
Which must occur to sustain growth in standard of living in the long run 

Definition


Term
Purchasing power method is equivalent to 

Definition


Term
Equation relating investment to capital stock 

Definition
DeltaK = sY  deltaK = sF(K,L)  deltaK
change in capital stock = investment  depreciation 


Term
In growth model, saving rate is 

Definition


Term
At equilibrium in the growth model 

Definition


Term
Long run steady state equilibrium, where capital stock is constant, equilibrium reduces to 

Definition
Kt+1  Kt = sf(Kt/N)  (symbol)(Kt/N) 


Term
Long run steady state equilibrium, where capital stock is constant, equilibrium reduces to 

Definition
sf(Kt/N) = (symbol)(Kt/N) 


Term
When capital stock per worker is below steady state 

Definition
capital/worker will rise because sf(Kt/N) > (symbol)(Kt/N) aka investment > depreciation 


Term

Definition
saving per worker is greater than depreciation per worker in t 


Term
When economy is at steady state 

Definition
saving is equal to depreciation 


Term
When economy is at steady state 

Definition
growth of saving per worker is 0 


Term
When economy is at steady state 

Definition
growth of investment per worker is 0 


Term
When economy is at steady state 

Definition
growth of capital stock per worker is 0 


Term
Level of output per worker in steady state will 

Definition


Term
Increase in consumption per worker will unambiguously 

Definition
increase output per worker 


Term
Reduction in saving rate will NOT affect which in long run? 

Definition
Growth rate of output per worker 


Term
Decrease in saving rate will 

Definition
decrease temporarily growth of output per worker 


Term
Increase in saving rate will cause 

Definition
temporary increase in the rate of growth output per capita 


Term
Country A has lower depreciation rate than B, we know that 

Definition


Term
Country A has lower depreciation rate than B, we know that 

Definition
steady state consumption in A is lower than B 


Term
If saving rate is 1 (s = 1), we know that 

Definition


Term

Definition
the saving rate that maximizes consumption 


Term

Definition
saving rate is below rate given by the golden rule 


Term
When consumption below the golden rule level 

Definition
increase in saving rate lowers consumption today, increases in future 


Term
When steady state capital per worker is above golden rule level, increase in saving rate will 

Definition
decrease consumption in short and long run 


Term
When saving rate is above golden rule level, increase in saving rate causes 

Definition
reduction in consumption per worker in long run 


Term
True or false?
Human capital does not affect standard of living in long run 

Definition


Term
Increase in human capital per worker 

Definition
will increase steady state consumption per worker 


Term
Saving rate in country A is greater than country B 

Definition
output per capita greater in B 


Term
in a Steady state: increase in depreciation 

Definition


Term
Which of the following represents a dimension of technological progress 

Definition
Larger quantities of output for given quantities of labor and capital, larger variety of products, new and/or better products 


Term
In the following production function, Y = f(K, NA), an increase in A represents 

Definition
an increase in effective labor 


Term
In the following production function, Y = f(K, NA), suppose A increases by 20 percent, this implies that 

Definition
the same output can be produced with 20 percent less labor 


Term
In the following production function, Y = f(K, NA), for a given state of technology, constant returns to scale implies that output will increase by 7 percent when 

Definition
K and N increase by 7 percent 


Term
Suppose the production function is written as Y/AN = f(K/AN). Then equal and successive increases in K/AN will cause 

Definition
smaller and smaller increases in output 


Term
In the growth model allowing for technological change in chapter 12, the equilibrium condition is 

Definition
I/AN = sf(K/AN), where I/AN = (smalldelta + gA + gN)K/AN 


Term
The equilibrium condition for the growth model allowing for technological change says that 

Definition
savings per effective worker equals the amount of investment that is needed to keep capital stock per effective worker constant 


Term
At equilibrium in the growth model with technological progress, the growth rate of output equals 

Definition
(gA + gN), the population growth rate plus the growth rate of technological progress 


Term
At equilibrium in the growth model with technological progress, the growth rate of output per worker, i.e. the growth in standard of living is 

Definition
gA, the growth rate of technological progress 


Term
Which of the following will cause an increase in output per effective worker? 

Definition
An increase in the saving rate 


Term
Which of the following will cause an increase in output per effective worker? 

Definition
A decrease in population growth 


Term
Which of the following will cause an increase in output per effective worker? 

Definition
A decrease in the rate of depreciation 


Term
Which of the following will cause an increase in output per effective worker? 

Definition
A decrease in the rate of technological progress 


Term
Which of the following will cause a reduction in the steadystate growth rate of output per worker? 

Definition
A decrease in the rate of technological progress 


Term
Assume: rate of depreciation is 10 percent per year, population growth rate is 2 percent per year, growth rate of technology is 3 percent per year. What is the annual growth rate of “effective labor” in the steady state in this economy? 

Definition


Term
Assume: rate of depreciation is 10 percent per year, population growth rate is 2 percent per year, growth rate of technology is 3 percent per year. What is the level of investment needed to maintain constant capital per effective worker in this country? 

Definition


Term
Assume: rate of depreciation is 10 percent per year, population growth rate is 2 percent per year, growth rate of technology is 3 percent per year. What is the steady state growth rate of output? 

Definition


Term
Assume: rate of depreciation is 10 percent per year, population growth rate is 2 percent per year, growth rate of technology is 3 percent per year. What is the steady state growth rate of output per worker? 

Definition


Term
Which of the following is true after an economy reaches a balanced growth equilibrium? 

Definition
Growth rate of capital is equal to the growth rate of the effective work force 


Term
Suppose output per worker has grown at the same rate as technology over many years, this country’s growth can be described as 

Definition


Term
Which of the following is constant when balanced growth is achieved? 

Definition


Term
Which of the following is NOT constant when balanced growth is achieved? 

Definition


Term
Once the economy has achieved balanced growth, the capital stock is 

Definition
growing at a rate of gA + gN 


Term
Once the economy has achieved balanced growth, output is 

Definition
growing at a rate of gA + gN 


Term
Once the economy has achieved balanced growth, output per effective worker is 

Definition


Term
Once the economy has achieved balanced growth, output per worker is 

Definition


Term
High growth in rich countries from 1950 to 2009 was most likely due to 

Definition


Term
Once the economy has achieved balanced growth, the growth rate of K/NA is 

Definition


Term
Which of the following represents the appropriability of research? 

Definition
The extent to which firms benefit from the results of their own R&D spending 


Term
Which of the following represents the fertility of research? 

Definition
How R&D spending translates into new ideas (and new products) 


Term
Patent protection is important for technological progress because it makes R&D 

Definition


Term
Two ways countries with low standards of living can catch up to countries with higher ones are 

Definition
improving technology and accumulating capital 


Term
Assume: rate of depreciation is 5 percent per year, population growth rate is 4 percent per year, growth rate of technology is 2 percent per year. What is the steady state growth rate of output? 

Definition


Term
Assume: rate of depreciation is 5 percent per year, population growth rate is 4 percent per year, growth rate of technology is 2 percent per year. What is the steady state growth rate of output per worker? 

Definition


Term
Assume: rate of depreciation is 5 percent per year, population growth rate is 4 percent per year, growth rate of technology is 2 percent per year. What is the steady state growth rate of effective labor is 

Definition


Term
Once the economy has achieved balanced growth 

Definition
S/AN = (smalldelta + gA + gN)K/AN 

