Economics 102                                         

Practice Questions 3                                                   

Spring 2001


I. True/False and explain


1. The classical model takes a short-run view of the economy, while the Keynesian model takes a more long-run view.


2.The classical model focuses primarily on nominal values.


3. The key assumption of the classical model is that the labor market and the loanable funds market clears while other markets do not necessarily clear.


4. According to the classical view, the economy needs the government’s help in achieving full employment.


5. The aggregate production function tells us how much output can be produced with different combinations of capital, land and labor.


6. An aggregate production function as studied in the classical model illustrates the law of diminishing returns to labor. 


7. Say’s law assures us that total spending is always just right to purchase the economy’s total output.


8. The existence of excess supplies or excess demands in some markets is inconsistent with Say’s law.


9. Investment spending and government purchases play the role of “injections” in the classical model.


10. In the classical model, leakages from the income-expenditure stream include taxes, saving, and export.


11. In the classical model, an increase in government spending—with no other change—will shift the total demand for funds curve rightward.


12. The key conclusions of the classical model do not hold if the government is running a budget surplus rather than a budget deficit. 


13. In the classical model, an increase in government purchases causes household saving to increase, and household consumption spending to decrease.


14. In the classical model, an increase in government purchases obtained by reducing transfer payments will not change the interest rate and furthermore, will not provide any incentive for households to save more.


15. Consider a ray from the origin that goes through a particular point on the aggregate production function.  We know that the slope of this ray is a measure of the labor productivity.


16. “Net taxes” are equal to the government’s total tax revenue minus government transfer payments.


17. An increase in the labor supply curve or an increase in the labor demand curve will have the same effect on economic growth and the wage rate.


18. When output grows more slowly than the population, real GDP per capita—which we call the average standard of living—will fall.


19. Increases in employment, with a constant capital stock, tends to raise productivity.


20. An investment tax credit promotes economic growth primarily by inducing firms to hire more workers, thus moving the economy along its aggregate production function.


21. A decrease in the budget deficit promotes economic growth primarily by lowering interest rates, which increases investment and speeds growth in the capital stock.


22. Less developed countries with very low growth rates typically suffer from a poor infrastructure and very low population growth rates.



II. Multiple Choices


1. The key critical assumption in the classical model is that

a. fiscal policy is ineffective.

b. output and income are equal.

c. the government is running a budget deficit.

d. markets clear.


2. In the classical view, if government purchases rise (and there is no other fiscal change),

a. output rises.

b. the interest rate rises.

c. the real wage rises.

d. employment rises.


3. A nation’s standard of living is best measured by its

a. employment rate.

b. real GDP per capita.

c. productivity.

d. capital per worker.


4. Productivity refers to:

a. the nation’s income growth rate.

b. GDP per capita.

c. the nation’s total output divided by the total labor force.

d. the output produced by the average worker in an hour.


5. Which of the following is NOT a determinant of productivity?

a. Wages.

b. Human capital.

c. Physical capital.

d. Technological skill.


6. Which of the following statements is correct?

a. If a nation invests more, it’s economic growth rate will be permanently higher.

b. In general, a given level of investment in a poor country will lead to greater economic growth than the same level of investment in a rich country.

c. A nation must keep a high population growth rate to have a high employment rate.

d. Increased economic growth through increased investment does not have an opportunity cost.


7. Which of the following might result in an increase of productivity?

a. Increasing investment from abroad.

b. Enforcing property rights.

c. More spending on education.

d. All of the above.


8. Which of the following is most likely to contribute to the growth of a poor country?

a. Rapid population growth.

b. An increase in money supply.

c. Secure property rights and political stability.

d. Encourage more investment abroad.


9. An increase in saving means

a. a slower economic growth.

b. fewer consumer goods will be produced.

c. a decrease in total spending.

d. an increase of unemployment.


10. Which of the following is a direct cause of the aggregate production function shifting upward?

a. An increase in human capital.

b. A decrease in physical capital.

c. An increase in saving.

c. An increase in employment.


11. Which of the following policies promotes growth by directly shifting the labor supply curve rightward?

a. A decrease in the benefits to the needy.

b. An increase in the wage rate.

c. An increase in the price level.

d. A cut in income tax rates.


12. Which of the following enables a less developed country to make use of a combination of consumption and capital goods beyond its PPF?

a. Technological improvement.

b. Foreign assistance.

c. Decreasing the growth rate of the population.

d. Shifting resources away from producing consumption goods and toward producing capital goods.


13. With the advent of stock trading over the Internet, more individuals are finding it easy to put their wealth in the stock market instead of holding their wealth in checking accounts like they did before. This will cause

a. demand for money to rise and the interest rate to fall.

b. demand for money to rise and the interest rate to rise.

c. demand for money to fall and the interest rate to fall.

d. demand for money to fall and the interest rate to rise.


14. Which of the following would tend to increase the pace of technological change?

a. A decrease in the life span of patents.

b. Imposing a special tax on R & D.

c. Decreasing interest rate.

d. Decreasing tax on capital gains.


15. The “consumption cost” of economic growth refers to the

a. need to cut back on government spending in order to promote economic growth.

b. increased pollution caused by rising living standards.

c. increased use of scarce natural resources as living standards rise.

d. need to shift resources away from the consumption-goods sector into production of capital goods to promote growth.