Download Problem Set 13

Problem Set 13
Econ 201 (03 and 04) Spring 2002
(Dr. Tin-Chun Lin)
1. According to the sticky wage theory, if the actual price level turns out to be less than the
expected price level, the real wage rate will be
(A) Less than the equilibrium real wage rate and employment will fall.
(B) Less than the equilibrium real wage rate and employment will rise.
(C) Higher than the equilibrium real wage rate and employment will fall.
(D) Higher than the equilibrium real wage rate and employment will rise.
(E) None of above.
(Answer: (C))
2. According to the flexible wage theory, if the price level increases, then real GDP supplied
will
(A) Remain unchanged but, according to the sticky wage theory, real GDP supplied will
increase.
(B) Remain unchanged but, according to the sticky wage theory, real GDP supplied will
decrease
(C) Increase and, according to the sticky wage theory, real GDP supplied will also increase.
(D) Increase but, according to the sticky wage theory, real GDP supplied will remain
unchanged.
(E) Decrease but, according to the sticky wage theory, real GDP supplied will increase.
(Answer: (A))
3. The fact that labor is an economically indivisible factor of production implies that
(A) Firms will tend to adjust the quantity of labor demanded by changing hours per worker
rather than changing the number of workers.
(B) Firms will tend to adjust the quantity of labor demanded by changing the number of
workers rather than changing hours per worker.
(C) Firms cannot hire fractions of workers.
(D) Workers will tend to work for a single firm.
(E) None of above.
(Answer: (B))
4. The current year’s price level is 180 and the rate of inflation over the past year has been 20
percent. What was last year’s price level?
(A) 144.
(B) 160.
(C) 216.
(D) 155.
(E) 150.
(Answer: (E))
5. Which of the following would cause a perpetual demand-pull inflation?
(A) A tax cut.
(B) An increase in government purchases of goods and services.
(C) An increase in the price of oil.
(D) A positive rate of growth in the quantity of money.
(E) A decrease in the price of oil.
(Answer: (D))
6. Which of the following would a cause cost-push inflation?
(A) A tax cut.
(B) An increase in government purchases of goods and services.
(C) An increase in the price of oil.
(D) A positive rate of growth in the quantity of money.
(E) A decrease in the price of oil.
(Answer: (C))
7. Work out the effects on the price level of the following unexpected events:
a. An increase in the money supply. (Answer: increase)
b. An increase in government purchases of goods and services. (Answer: increase)
c. An increase in income taxes. (Answer: decrease)
d. An increase in investment demand. (Answer: increase)
e. An increase in the wage rate. (Answer: increase)
f. An increase in labor productivity. (Answer: decrease)
8. Work out the effects on the price level of the following events when they are correctly
anticipated:
a. An increase in the money supply. (Answer: increases by more than in the case explored
in the answer to (7) in part (a))
b. An increase in government purchases of goods and services. (Answer: increases by more
than in the case explored in the answer to (7) in part (b))
c. An increase in income taxes. (Answer: decreases by more than in the case explored in the
answer to (7) in part (c))
d. An increase in investment demand. (Answer: increases by more than in the case explored
in the answer to (7) in part (d))
e. An increase in the wage rate. (Answer: increases by more than in the case explored in the
answer to (7) in part (e))
f. An increase in labor productivity. (Answer: decreases by more than in the case explored
in the answer to (7) in part (f))
9. An economy in which wages are flexible has a long-run aggregate supply of $3.5 trillion. It
has the following expected aggregate demand curve:
Price level (GDP deflator)
Expected GDP demanded (trillions of $)
80
5.0
90
4.5
100
4.0
110
3.5
120
3.0
130
2.5
140
2.0
a. What is the expected price level? (Answer: 110)
b. What is expected real GDP? (Answer: $3.5 trillion)
10. (True or False) The short-run aggregate production function will shift downward when there
is an increase in the stock of capital. (Answer: False)