Discuss four problems with the CPI. Does the CPI tend to overestimate or underestimate the true inflation rate? How big is this bias? What will be an ideal response? ANSWER The CPI tends to overestimate the true inflation rate because it ignores the substitution of cheaper goods for more costly goods, because it ignores […]
In the view of the new classical economists, an increase in the money stock will affect real output and employment only if the increase in the money stock a. was caused by an aggregate supply shock. b. is accompanied by an expansionary fiscal policy shift. c. was anticipated. d. was unanticipated. ANSWER D
A fall in autonomous investment will shift the a. IS curve to the right toward higher interest rates and output. b. LM curve to the right towards lower interest rates and higher output. c. IS curve to the left towards higher interest rates and output. d. None of the above ANSWER D
One factor which did not influence the levels of real output and employment in the classical system was the a. stock of capital. b. level of technology. c. the price level. d. size of the labor force. ANSWER C
Is it possible to have a production function that exhibits both a diminishing marginal product of labor and constant returns to scale? Explain. What will be an ideal response? ANSWER Yes is it possible. Under constant returns to scale, both labor and capital are increased at the same time, increasing output by the same […]
A pure positive income shock leads to A) an increase in leisure and consumption. B) an increase in leisure and work. C) an increase in work and consumption. D) an increase in leisure and taxes. ANSWER A
Using the simple Keynesian model, consider the case where taxes are lump-sum. Compared to the model without taxes, the investment multiplier in this model will a. not change. b. be larger. c. be smaller. d. be equal to 1 ANSWER A
Assuming that C + Ir + G < C + I + G, then a. there is an unintended inventory accumulation. b. there is an unintended inventory shortfall. c. aggregate demand is less than output. d. Both b and c ANSWER D
In the simple Keynesian model (no money market) assume that equilibrium output falls short of potential output by 300 units and the MPC = 0.8 . The size of the tax cut needed to reach full employment is a. 30. b. 60. c. 75. d. 300. ANSWER C
An increase in real dividend income minus taxes represents A) a pure substitution effect. B) a pure income effect. C) a combination of income and substitution effects. D) neither a pure income effect nor a pure substitution effect. ANSWER B
