Short-run and long run behavior of the economy

Question

I. True/False and explain:

Question 1) The classical model is a macroeconomic model that tries to explain both short-run and long run behavior of the economy.

Question 2) The classical model focuses primarily on explaining both real and nominal values.

Question 3) One of the assumptions of the classical model is that the labor market and the loanable funds market are always in equilibrium.

Question 4) The Keynesian model was developed to explain fluctuations around the long-run trend, while the classical model is used to explain the long-run trend itself.

Question 5) Market clearing is a reasonable assumption in the short-run.

Question 6) According to the classical view, the economy needs the government's help in achieving full employment.

Question 7) In the labor market, like any other market for goods and services, households are on the demand side and firms are on the supply side.

Question 8) In the classical model there is no structural unemployment.

Question 9) The aggregate production function displays the relationship between total employment and total output in the economy using different amount of resources.

Question 10) The aggregate production function displays increasing returns to labor because it is upward sloping.

Question 11) Say's law assures us that leakages will always equal injections in an economy.

Question 12) In the classical model net taxes and government purchases are referred to as leakages.

Question 13) In the Loanable funds market, the government could be either on the supply or demand side, depending on whether it is running a budget deficit or a surplus.

Question 14) Lower interest rates tend to stimulate planned investment.

Question 15) In the classical model, leakages from the income-expenditure stream include taxes, saving, and exports.

Question 16) In the classical model, an increase in government spending will partially crowd out investment and consumption spending.

Question 17) An increase in government spending will lead to an increase in total output in the long run.

Question 18) A increase in social security payments will change the interest rate and furthermore, will provide an incentive for households to save more.

Question 19) Increases in employment, with a constant capital stock, tend to raise productivity.  

II. Multiple Choices:

Question 20) Under the market clearing assumption, an excess supply of a certain good will result in a(n)

1. Increase in price and decrease in quantity demanded
2. Decrease in price and increase in quantity demanded
3. Decrease in price and decrease in quantity demanded
4. Increase in price and increase in quantity demanded

Question 21)  Consider the following demand and supply of labor information for the country of Simpleland:

L^S = 1/2w - 10

 

L^D = 50 - 2w

(w = real hourly wage)

At a real hourly wage of $20

1. the labor market in Simpleland is in equilibrium.
2. there is an excess demand of 10 workers.
3. there is an excess demand of 25 workers.
4. there is an excess supply of 10 workers.

Question 22) To determine GDP from the production function, we need to know

1. the unemployment rate.
2. the quantity of labor supplied by firms.
3. the quantity of labor available for work.
4. the quantity of labor employed.

Question 23)  In the Classical model, a fiscal policy that increases government spending and taxes equally is probably going to lead to

1. a decrease in private consumption, savings and investment.
2. a decrease in saving, but an increase in investment.
3. a decrease in investment.
4. complete crowding out of investment.

Question 24) Consider the following information about the country of Simpleland

(G - T) = $600

T = $600

I = $800 - 4000 i_R

The equilibrium interest rate, i_R, is 10%

According to the Classical model, leakages in this problem equal

1. $1,600.
2. $1,200.
3. $800.
4. $2,000.

III. Problems:

Question 25) The tables below show a nation's labor demand and labor supply schedules and its production function

                    Table 1                                                                                Table 2

Real wage rate (2003 dollars)	Quantity of labor demanded (billions of hours per year)	Quantity of labor supplied (billions of hours per year)		Employment (billions of hours per year)	Real GDP (billions of 2003 dollars)
50	80	100		60	3.0
40	90	90		70	4.0
30	100	80		80	4.7
20	110	70		90	5.2
10	120	60		110	5.5

1. What is the equilibrium real wage rate?
2. What is the equilibrium quantity of labor?
3. What is the potential GDP?

Question 26) The following table summarizes the demand and supply of labor for the country of Wanderland:

Real Hourly Wage	Supply of labor (number of workers)	Demand of labor (number of workers)
$7	500 ,000	4,000,000
$10	1,000,000	3,000,000
$15	2,000,000	2,000,000
$21	3,000,000	1,500,000

Suppose that the real hourly wage in this country is now $10.

1. What is the current situation in the market?
2. According to the classical view, what is going to happen in this market?
3. What is the real hourly wage at full employment?
4. If the Aggregate production function is:

Output = 500,000 + (2,600,000,000, 000, 000/Number of workers)

what is the full employment output of the economy?

Question 27) You have the following information about the economy in year 2004:

Savings = $ 2.5 billion.

Planned Investment = $ 4 billion.

Government purchases = $ 1.5 billion.

Taxes = $ 3 billion.

1. Compute the budget deficit.
2. Compute the quantity of loanable funds supplied.
3. Compute the quantity of loanable funds demanded.
4. Is the loanable funds market clearing in this economy?
5. Compute total leakages and total injections in this economy.

Question 28) The country of Simpleland produces only Widgets. The following information is available:

Output:                 225,000 Widgets

Employed              25,000   people

Population              75,000   people

1. What is the productivity of labor in Simpleland?
2. What is GDP per capita in this economy?
3. A higher real wage induces 50% of the idle population to find a job. Following the increase in labor, output raises by 25,000 Widgets. What are the new levels of productivity and GDP per capita in Simpleland?