Econ: Ch. 7

1. Refer to the table below. Which statement below best describes what the table portrays?

As the amount of labor increases, output increases at an increasing rate

As the amount of labor increases, output increases at a diminishing rate

Labor can increase only as output increases

The quantity of capital required to produce each level of output must be less and less as output increases

2. Increases in government spending in a closed economy at full-employment, with the supply of output (Y) fixed, will:

Necessarily result in reductions in consumption and/or investment

Have no impact on consumption or investment

Result in crowding in

Have an impact on net exports, but not on consumption or investment

3. Fill in the blanks. During World War II, as the share of government spending rose sharply, the share of consumption spending and the share of investment spending .

Increased; increased

Decreased; decreased

Increased; decreased

Decreased; increased

4. Crowding in occurs when:

Governments cut spending, and the level of output is fixed, thus some other type of spending must increase

Consumption and investment decrease, leading to an increase in GDP

All the components of GDP increase at the same time

An economy is open to net exports, thereby increasing the value of GDP

5. Refer to the figure below. Select the statement below that best describes what this graph portrays.

With the stock of capital fixed, only variations in labor can change the level of output in the economy

A given amount of output generates a specific level of employment in the economy

6. The concept of full-employment output is based on the idea that:

The economy produces the maximum level of output that it can produce

The government budget is in balance

The labor market is in equilibrium

All of the above

7. According to the full employment model presented in the textbook, the extent of a decline in output following the imposition of a labor tax on employers depends primarily on:

The slope of the labor supply curve

The slope of the demand for labor curve

How much the labor supply curve increases as a result of the tax

How much the labor supply curve decreases as a result of the tax

8. Combining the production function for the economy as a whole and the demand and supply for labor yields a model that helps to determine:

How output will be divided among shares of GDP

How taxes can be used to achieve equilibrium in the labor market

How much output the economy can produce when it is operating at full employment

How crowding out works

9.
The level of potential output in an economy increases as

The supply of labor increases or the stock of capital decreases

The supply of labor increases or the stock of capital increases

The supply of labor decreases or the stock of capital increases

The supply of labor decreases or the stock of capital decreases

10. If someone told you that in a small European country employment and wages have risen, you could use your understanding of labor markets to deduce that there has been:

An increase in labor supply in that country

A decrease in labor supply in that country

An increase in labor demand in that country

A decrease in labor demand in that country

11. Refer to the figure below. Which graph best depicts the impact of an increase in the stock of capital?

The graph on the left

The graph on the right

Both graphs shift simultaneously with an increase in the stock of capital

Neither graph. Changes in the stock of capital do not affect the labor market

12. When will a tax that affects labor demand have no effect on employment and therefore no effect on output?

When labor demand is horizontal

When labor supply is upward sloping

When labor supply is horizontal

When the labor supply curve is vertical

13. In this chapter, we examine how the amount of GDP when the economy is at full employment is determined by:

The government

The level of unemployment and inflation

The demand for goods and services

The amount of capital and labor

14. According to the real business cycle theory, changes in technology are capable of:

Creating fluctuations in demand for goods and services in the short run

Revolutionizing the structure of the labor market

Changing the level of full employment or potential output

Explaining the sources of all post–World War II recessions

15. The relationship between the total level of output, or GDP, and the corresponding amount of factors of production, or inputs needed to produce it, is called:

A supply curve

Productivity

Efficiency

The production function

16. At full employment, the opportunity cost of increased government spending is:

Zero

Wealth

Government spending itself

A decrease in some other component of GDP

17. The real business cycle theory suggests that:

Government policies shift the demand for goods and services thus full employment

The business cycle can be demonstrated in many countries and is therefore a proven phenomenon

The business cycle is caused by rapid fluctuations in wages that occur when the supply and demand of goods changes

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