Mankiw Macroeconomics 6e Ch03 1. The returns to scale in the production function Y = K0.5 L0.5 are constant. 2. If a production function has two inputs and exhibits constant returns to scale, then doubling both inputs will cause the output to double. 3. If the supplies of capital and labor are fixed and technology is unchanging, then real output is fixed. 4. If a production function has the property of diminishing marginal product, then doubling one of the inputs will reduce its marginal product. 5. Consider the following production table:
Labor
Capital
Output
(i)
1,000
1,000
10,000
(ii)
2,002
2,000
20,010
Assuming that the production function displays constant returns to scale, what is the marginal product of labor when labor and capital are both equal to 1,000? 5 6. Consider the following production table:
Labor
Capital
Output
By how much does the marginal product of labor decrease as labor input increases from 1 to 2 and from 2 to 3? 1 7. Euler's theorem implies that if a production function exhibits constant returns to scale economic profit is zero. 8. If a firm with a constant returns to scale production function pays all factors their marginal products, then economic profit is zero and accounting profit is positive. 9. Which of the following is not a decision made by a competitive firm? What price to ask for its product 10. A competitive firm hires labor until the marginal product of labor equals the real wage. 11. A competitive firm rents capital until the marginal product of capital equals the rental price of capital. 12. Economic profit is the same as accounting profit minus the return to capital 13. Suppose that a major natural disaster destroys a large part of a country's capital stock but miraculously does not cause anybody bodily harm. What will happen to the real wage rate? It will fall. 14. Which of the following is not a characteristic of the Cobb-Douglas production function? Capital and labor receive equal fractions of income. 15. In the Cobb-Douglas production function, Y = K a L 1-a , the fraction of income spent in payments to labor is 1 - a. 16. In a closed economy, the supply of goods and services must be equal to consumption + investment + government purchases. 17. Suppose that a consumer has a marginal propensity to consume of 0.7. If this consumer earns an extra $2, her consumption spending would be expected to increase by $1.40. 18. Suppose that a consumer has a marginal propensity to consume of 0.8. If this consumer receives and extra $2 of disposable income, her saving would be expected to increase by $0.40. 19. Which of the following operations is not considered investment? An individual purchases several pieces of antique furniture. 20. Suppose that Jones builds a new house, then she sells it to Smith, and then Smith sells it to Williams. The total net investment from these transactions is 1 house. 21. If the real interest rate rises, the quantity of investment demanded will fall. 22. The real interest rate is equal to the nominal interest rate minus inflation. 23. Choose the pair of words that best completes this sentence: Investment depends on the ________ interest rate because higher inflation will ________ the value of the dollars with which the firm will repay the loan. real, decrease 24. In a closed economy that is in equilibrium, investment is equal to private saving plus public saving. 25. The government is running a budget deficit if government spending is greater than tax revenue. 26. Private saving is equal to income - consumption - taxes. 27. The supply of loanable funds, or "national saving," is equal to income - consumption - government spending. 28. In a closed economy, with total output and taxes fixed, if government spending rises investment falls. 29. In a closed economy with total income fixed, a reduction in taxes will cause consumption to rise and investment to fall.
30. Suppose that there is a positive shock to investment demand: that is, at every interest rate, the desired amount of investment rises. In a closed economy with the national saving fixed, the real interest rate will rise. 31. According to the simple macroeconomic model presented in Chapter 3, which of the following will not be caused by an increase in government spending? Decrease in consumption 32. In a closed economy with output fixed, an increase in government spending matched by an equal increase in taxes will increase the interest rate. 33. In a closed economy with fixed output, an increase in government spending without any change in taxes will lead to a(n) increase in the real interest rate and no change in private saving. 34. In the simple macroeconomic model of Chapter 3, a decrease in taxes will shift the savings curve to the left. 35. A leftward shift of the savings curve cannot be caused by a(n) increase in the real interest rate. 36. In the full model of the economy presented in chapter 3, the variable that adjusts to equilibrate the supply and demand for goods and services is the real interest rate.
Mankiw Macroeconomics 6e Ch04 completed 1. Which of the following is not a function of money? It is a means of production. 2. One purpose of money is to transfer purchasing power from the present into the future. This function of money is called store of value. 3. One purpose of money is to provide the terms in which prices are quoted and debts are recorded. This function of money is called unit of account. 4. One purpose of money is to be the item we use to buy and sell things. This function of money is called medium of exchange. 5. Of all of the following that could be used as money, which would be most likely to be characterized as fiat money? Gum wrappers 6. Which of the following is a type of open-market operation? The Fed sells Treasury bills to the public. 7. M2 does not include long-term government bonds. 8. In the quantity equation, V represents the the rate at which each unit of money circulates in the economy. 9. According to the quantity equation, if M increases by 3 percent and V increases by 2 percent, then nominal income increases by approximately 5 percent. 10. According to the quantity equation, which of the following might happen if the money supply increases? Velocity is constant, prices are constant, and total output increases. 11. Consider an economy where the money supply is growing at 7 percent per year and velocity is constant. Which of the following statements about real GDP growth and the inflation rate could be true?
Real GDP is growing at 2 percent and inflation is 5 percent. 12. Consider an economy where the only goods traded are coconuts and pineapples. Last year, 100 coconuts were sold at $1 apiece, and 200 pineapples were sold at $2.50 apiece. If the money supply was $100, what was velocity? 6 13. Which component of the quantity equation is assumed constant by the quantity theory of money? The velocity of money 14. The quantity theory of money states that if the money supply doubles and output is constant, prices will double.
15. The difference between the nominal interest rate and the real interest rate is inflation. 16. The Fisher equation states that a 1 percent rise in the rate of inflation causes a 1 percent rise in the nominal interest rate. 17. The ex ante real interest rate differs from the ex post real interest rate only when actual inflation differs from expected inflation. 18. Which of the following statements is false? If inflation is higher than the real interest rate, then the nominal interest rate must be negative. 19. Consider the following table
Year
Inflation Rate
Nominal Interest Rate
5%
10%
10%
5%
By how much has the real interest rate changed between year 1 and year 2? It has decreased 10 percent.
20. The expected rate of inflation does not influence the ex post real interest rate. 21. Government revenue raised through the printing of money is called seignorage. 22. Suppose that the price level has risen but the government has not collected any seignorage. Which of the following might have happened? V rose, M and Y were constant 23. When the government raises revenue by printing money, it imposes an "inflation tax" because the real value of money holdings falls. 24. The cost of holding money is determined by the nominal interest rate. 25. An increase in the expected rate of inflation will lower demand for real balances because the nominal interest rate will rise. 26. The expected future money supply does not have an effect on the current nominal money supply. 27. Choose the pair of words that best completes this sentence: The nominal interest rate is the sum of the ex ante real interest rate and the _________ inflation rate, and real money balances are a function of the ___________ interest rate. expected; nominal 28. If an individual is to hold lower money balances on average, she must make more frequent trips to the bank to withdraw money. This inconvenience of reducing money holding is called a shoeleather cost. 29. One effect of an unexpected rise in inflation is that wealth is redistributed from lenders to borrowers. 30. Which of the following is not a social cost of inflation? The money that people hold loses value due to the inflation tax. 31. One possible benefit from inflation is: if nominal wages are fixed, inflation decreases real wages. 32. Hyperinflation usually starts when governments are forced to print money to finance their spending. 33. According to the classical dichotomy, which of these magnitudes is affected by monetary policy? The price level
