Banks in the Diamond-Dybvig model can offer depositors increased liquidity because A) both individual depositors’ liquidity needs and average depositor liquidity needs are predictable. B) while individual depositors’ liquidity needs are unpredictable, average depositor liquidity needs are predictable. C) while individual depositors’ liquidity needs are predictable, average depositor liquidity needs are unpredictable. D) neither individual […]
Explain why the labor supply curve is positively sloped. Explain why labor demand is downward sloping. What will be an ideal response? ANSWER It is assumed that additional labor is supplied at higher real wage rates. At a higher real wage rate, the price of leisure is greater in terms of foregone income. Along […]
If an increase in government spending of 40 units accompanied by an equal increase in taxes caused equilibrium income to rise by 40 units, the autonomous expenditure multiplier must be a. 10. b. 1. c. 4. d. not enough information is given to calculate the multiplier. ANSWER D
An asset’s liquidity depends upon A) the absolute size of its value and how long it takes to sell the asset at market value. B) how long it takes to sell the asset at market value and the costs of selling the asset. C) the costs of selling the asset and the fraction of its […]
How do you suppose most people form an expectation of future inflation? Is that method consistent with the assumption of adaptive expectations? What will be an ideal response? ANSWER Like any mechanic in the Bronx, most people distil a “gut opinion” from their personal experience and what they read in the papers, hear from […]
In a fully-funded social security program A) the young pay for the benefits of the old. B) the young are forced to save for their own retirement. C) the young have to buy bonds for the old. D) the young are forced to save for the retirement of the old. ANSWER B
The proposition that changes in the money supply have no long-run effect on real variables is known as the ________. A) classical dichotomy B) quantity theory of money C) neutrality of money D) Fisher effect E) none of the above ANSWER C
What kinds of economic activities are excluded from GDP? If GDP misses these things, then why do we use it? What will be an ideal response? ANSWER GDP ignores underground activities, household production, externalities such as pollution, and income distribution. Economists still use it because it is highly correlated with all other measures of […]
Pay-as-you-go social security A) can never improve economic welfare for everyone. B) can improve welfare for everyone if the population growth rate is large enough. C) is always inefficient. D) is not used by any countries in the world. ANSWER B
Both the trade and budget balance were in roughly zero until the 1980s when the budget deficit increased dramatically and the U.S. trade deficit increased dramatically. However, during the late 1990s the budget deficit shrank—in fact, moving to surplus—at the same time that the U.S. trade deficit increased significantly. Since 2000, the budget deficit has […]
