1) Efficiency wage theory suggests that

A) workers will be paid less than their reservation wage.

B) productivity might drop if the wage rate is too low.
C) the government can only set tax rates so high before people will prefer not to work.
D) unskilled workers will have a lower turnover rate than skilled workers.
E) firms will be more resistant to wage increases as the labor market tightens.
Answer: B
Diff: 2

2) If efficiency wage theory is valid, we would expect a relatively low premium over the
reservation wage when
A) the unemployment rate is low.
B) the job requires very little training.
C) workers can be easily monitored.
D) workers have few other options for employment in the area.
E) all of the above
Answer: C
Diff: 2

3) Henry Ford's experiment with efficiency wages resulted in

A) a dramatic drop in productivity.
B) a dramatic increase in the turnover rate.
C) a reduction in the layoff rate.
D) new problems with the work force, like drunkenness and reckless driving.
E) no noticeable effects.
Answer: C
Diff: 2

4) In the wage-setting relation, the nominal wage tends to decrease when

A) the price level increases.
B) the unemployment rate decreases.
C) unemployment benefits decrease.
D) the minimum wage increases.
E) all of the above
Answer: C
Diff: 1

5) Suppose workers and firms expect the overall price level to increase by 5%. Given this
information, we would expect that
A) the nominal wage will increase by less than 5%.
B) the nominal wage will increase by exactly 5%.
C) the nominal wage will increase by more than 5%.
D) the real wage will increase by 5%.
E) the real wage will increase by less than 5%.
Answer: B
Diff: 2
6) Based on price setting behavior, we know that a reduction in the unemployment rate will
cause
A) no change in the real wage.
B) a reduction in the real wage.
C) an increase in the real wage.
D) an upward shift of the PS curve.
Answer: A

7) A reduction in unemployment benefits will tend to cause which of the following?

A) an upward shift in the WS curve
B) a downward shift in the WS curve
C) an upward shift in the PS curve
D) a downward shift in the PS curve
E) none of the above
Answer: B
Diff: 2

8) Since approximately 1970, the most stable Phillips-type relationship for the United States has
been between which of the following?
A) the rate of inflation and the change in the unemployment rate
B) the unemployment rate and the change in the rate of inflation
C) the change in the unemployment rate and the change in the rate of inflation
D) the inverse of the unemployment rate and the rate of inflation
E) the unemployment rate and the rate of inflation
Answer: B

9) For this question, assume that individuals form expectations of inflation according to the
following equation πet = θπt-1. From 1970 on, the value of θ for this equation
A) increased over time and approached 1.
B) decreased over time and approached zero.
C) remained constant at zero.
D) remained constant at negative one.
E) none of the above
Answer: A
Diff: 2

10) The original Phillips curve implied or assumed that

A) the markup over labor costs was zero.
B) the expected rate of inflation would be zero.
C) the actual and expected rates of inflation would always be equal.
D) all of the above
E) none of the above
Answer: B
Diff: 2
11) Use the following Phillips curve equation to answer this question: πt - πt-1 = (m + z) - αut.
Which of the following will cause an increase in the natural rate of unemployment?
A) a reduction in m
B) an increase in z
C) an increase in α
D) a reduction in expected inflation
E) none of the above
Answer: B

12) Assume that expected inflation is based on the following: πet = θπt-1. If θ = 0, we know that
A) a reduction in the unemployment rate will have no effect on inflation.
B) low rates of unemployment will cause steadily increasing rates of inflation.
C) high rates of unemployment will cause steadily declining rates of inflation.
D) the Phillips curve illustrates the relationship between the level of inflation rate and the level
of the unemployment rate.
Answer: D

13) Which of the following does not represent a "labor market rigidity" to which critics refer
when discussing unemployment in Europe?
A) generous unemployment insurance
B) restrictive monetary and fiscal policies
C) a high degree of employment protection
D) relatively high minimum wages
E) none of the above
Answer: B

14) Suppose the Phillips curve is represented by the following equation: πt - πt-1 = 20 - 2ut.
Given this information, we know that the natural rate of unemployment in this economy is
A) 10%.
B) 20%.
C) 6.5%.
D) 5%.
E) none of the above
Answer: A

15) Of the following, the most often used measure of changing living standards is
A) the growth rate of nominal GDP.
B) the growth rate of real GDP.
C) the growth rate of nominal GDP per capita.
D) the growth rate of real GDP per capita.
E) unemployment per capita.
Answer: D
16) Suppose individuals wish to obtain the most accurate comparison of living standards
between the Canada and Saudi Arabia. To do so, one would convert Saudi Arabian output into
dollars using
A) the current nominal exchange rate.
B) the current real exchange rate.
C) the prior year's real exchange rate.
D) an average of the last five years' exchange rates.
E) purchasing power parity methods.

Answer: E

17) "Convergence" has been occurring among the OECD countries because
A) the richer countries give away more of their output than the poorer ones.
B) the poorer countries have had higher growth rates than the richer ones.
C) the richer countries have had higher growth rates than the poorer ones.
D) the poorer countries have had positive growth rates, while the richer ones have had negative
growth rates.
E) the procedures for measuring output per capita have been changing.

Answer B

18) For this question, assume that there are decreasing returns to capital, decreasing returns to
labor, and constant returns to scale. A reduction in the capital stock will cause which of the
following?
A) a reduction in output
B) no change in output
C) an increase in output per capita
D) increase the capital-labor ratio
E) none of the above
Answer A

19) Which of the following will cause a reduction in output per worker in the long run run?
A) capital accumulation or technological progress
B) capital accumulation
C) an increase in the number of workers
D) expansionary monetary policy
E) none of the above
Answer C

20) Which of the following must occur to sustain economic growth in the long run?
A) technological progress
B) capital accumulation
C) a higher saving rate
D) all of the above
Answer A

21) Suppose there are two countries that are identical with the following exception. The saving
rate in country A is greater than the saving rate in country B. Given this information, we know
that in the long run
A) the capital-labor ratio (K/N) will be greater in B than in A.
B) the capital-labor ratio (K/N) will be greater in A than in B.
C) the capital-labor ratio (K/N) will be the same in the two countries.
D) economic growth will be higher in A than in B.

Answer: C

22) Assume that constant returns to scale exists and that N and K both increase by 2%. Given
this information, we know that
A) output (Y) will increase by 4%.
B) Y will increase by 2%.
C) Y will increase by less than 2%.
D) Y will increase by less than 4% and more than 2%.
Answer B

23) For this question, assume that the saving rate increases. We know that this increase in the
saving rate will cause which of the following?
A) a temporary increase in the level of output per capita
B) no permanent change in the level of output per capita
C) a temporary increase in the rate of growth of output per capita
D) a permanently higher rate of growth of output per capita
E) none of the above
Answer: C

24) Which of the following will cause an increase in output per worker (Y/N)?
A) an increase in the capital stock (K)
B) an increase in the saving rate
C) an increase in K/N
D) all of the above

Answer: D

25) Economic growth implicitly assumes

A) property rights
B) governance
C) legal systems
D) market structures
E) All of the above
Answer: E
26) Recessions are due to
A) low economic growth
B) fluctuations of output around potential output
C) two consecutive quarters of negative growth
D) poor government fiscal and monetary policies
Answer: C

27) Higher Savings are important for the economy as

A) They boost aggregate demand in short run
B) Lead to economic growth in the long run
C) Reduces aggregate demand in the short run
D) B and C
Answer: D
28) Japan’s natural rate of unemployment is low because
A) Bargaining power of trade unions is declining
B) Seniority based wage system
C) Shrinking Population and longevity
D) All the above
Answer D

29) Given the broadest interpretation of technology, technology will include which of the
following?
A) how well firms are run
B) the organization and sophistication of markets
C) the political environment
D) the list of blueprints defining the types of products and the techniques available to produce
them
E) all of the above
Answer E

30) Which of the following situations generally exists when deflation occurs?
A) Inflation and unemployment are both increasing.
B) Inflation and unemployment are both decreasing.
C) The price level is decreasing.
D) The rate of inflation is falling from, for example, 10% to 3%.
E) The natural rate of unemployment is zero.
Answer C

Answer all questions:

31) Explain how the original Phillips curve differs from the expectations-augmented Phillips
curve (or the modified, or accelerationist Phillips curve). 2 points
Answer: The original Phillips curve did not take into account the effects of changes in expected
inflation on inflation. The expectations-augmented Phillips curve did allow for changes in
expected inflation to affect actual inflation.
Diff: 2
32) Is it possible for a country to experience a permanent increase in output per worker over
time? If so, how can this occur? 2 points
Answer: Yes, it is possible for sustained growth to occur. For sustained growth to occur,
technological progress must occur. Changes in the saving rate will not cause sustained changes
in growth rates.
Diff: 2

33) Consider the production function--- 2 points

Y=
a. Compute output when K = 81 and N = 100.
b. Is this production function characterized by constant returns to scale? Explain.
Answer:
a. Y = 9 * 10 = 90
b. If both K and N double, Y also doubles. Yes, this production function is characterized by
constant returns to scale.
Diff: 2

34) Consider the production function, Y = , write the production function as a relation
between output per worker and capital per worker. 2 points

Answer: =

Diff: 2

35) Based on your understanding of the labor market model presented by Blanchard (i.e., the WS
and PS relations), explain what types of policies could be implemented to cause a reduction in
the natural rate of unemployment. 2 points
Answer: The natural rate of unemployment will change whenever either the PS or WS relations
change. To reduce the natural rate, policy makers could implement polices that: (1) reduce
unemployment benefits; (2) reduce the minimum wage; or (3) increase competition in product
markets.
Diff: 2

36) What led to the different growth patterns of North and South Korea since the 1970s? 3 points

37) What role does FDI play in economic growth? 2 points