ECON 3010
Intermediate Macroeconomics
Fall 2004
Study Questions for Exam #1
Definitions:
|
gross domestic product constant returns to scale capital deepening |
crowding out effect endogenous growth models human capital |
autonomous consumption capital-labor ratio marginal tax rate lump sum tax |
Short Answers:
1. Discuss two criticisms of using GDP to measure economic welfare.
2. What are the key determinants of the long run rate of growth of output in neoclassical growth models?
3. Explain the convergence hypothesis.
The following questions refer to classical economics.
4. Explain why the labor demand curve is downward sloping and the labor supply curve is upward sloping when plotted against the real wage.
5. Why is there always full employment? What assumptions do the classicals make about the labor market that insures this outcome?
6. What is the Quantity Theory of Money? Why do people demand money? What is the Cambridge equation of money?
7. What role does money play in the classical model? Why does a change in the supply of money have no effect on output?
8. How is the interest rate determined?
9. What determines the level of business investment? What determines an individual's decision to save?
10. Explain what kind of tax policy will have an effect on output? What kind of tax cut will have no effect on output?
11. What are the major policy conclusions of classical economics? Explain how the policy conclusions follow from the key assumptions of the classical theoretical system.
The following questions refer to the simple Keynesian model.
12. Explain why Keynes found it necessary to attack classical economic theory.
13. What is the equilibrium condition for the simple Keynesian model? How is this vision (or metaphor) of the economy different from the classicals?
14. Explain the difference between realized investment and desired investment.
15. How does the Keynesian theory of investment differ from the classicals?
16. What is the autonomous expenditure multiplier and what role does it play in Keynesian theory?
17. What is the tax multiplier and how does it differ from the autonomous expenditure multiplier?
18. Explain how imports and exports affect aggregate demand.
Graphical Exercises
1. Illustrate why the classical aggregate supply curve is perfectly vertical at full employment. Show how and why a change in the price level has no effect on output. (note: you will need to show graphically what happens in the labor market with both real and nominal wages)
2. Show graphically what happens in the classical model in response to the following events.
A. an increase in the money supply
B. an increase in savings
C. an increase in government spending financed by selling
bonds
D. an increase in workers' preference for leisure
3. Draw a graph that illustrates equilibrium in the simple Keynesian model.
4. The following problems refer to the simple Keynesian model. Assume the economy is at an equilibrium level of Y at $500 billion and the MPC = .8. Calculate the new level of equilibrium Y in response to the following events. Illustrate these changes graphically.
A. an increase of G by $10B
B. decrease of I by $5B
C. an increase of G by $5B and an increase of T
by $5B.
D. a decrease of T by 10B