Prin. of Macro – Quiz 4
Name: ______________________
Multiple Choice: Select the BEST answer to the following questions
1. An increase in a nation’s capital stock (amount of capital employed by firms)
b. makes labor more productive and hence firm’s demand more labor.
2. Which characteristics tends to be negatively effected by improved economic freedoms
b. infant mortality
3. Based on the relationship of economic freedom and economic growth there are no examples of countries
that have:
b. low economic freedom and high economic growth
4. The catch-up effect says that countries with low income can grow faster than countries with higher
income.
c. evidence supports this theory for countries with similar institutional infrastructure.
5. From our basic model, an increase in labor demand leads to
a. an increase in the wage rates, the number of people, and GDP.
6. A secondary effect of an increase in labor demand is
a. a decrease in the price level and interest rate
7. Long run economic growth is likely caused by
d. all of the above
8. Which of the following factors, if present, would act to impede the progress of a developing country?
b. economic freedom
9. The short run impact of a change in consumer patience is felt
d. only in the loanable funds market
10. Why is private ownership an important source of economic prosperity?
d. It provides owners with a strong incentive to develop and use assets in ways that others value
highly.
11. The loanable funds market is the market where
b. equilibrium interest rates are determined by the actions of borrowers and lenders
12. One means of achieving economic growth is through improvements in the capital to labor ratio,
however
a. is sustainable only with continual dedication for private investment in capital.
13. Thomas Malthus, an 18th century writer-philosopher, believed man-kind was doomed to cycles of
prosperity then death and dying that would then repeat. He believed this because
d. resources grow at a slower rate than human population and thus become overly strained.
14. Other things constant, an increase in production technology in an economy
a. makes labor more productive
15. In order to achieve a high economic freedom rating, a country must
d. protect property rights, enforce contracts even-handedly, and rely extensively on markets to
allocate goods and services.
16. Which of the following is not directly represented in our basic model?
a. foreign exchange rates
The People’s Republic of France is in the process of mandating the 32-hour workweek. If
people are now working 40 hours a week and the mandatory 32-hour week becomes standard
(the labor supply curve becomes independent of wages, i.e. vertical, at 32 hours of work per
person), what will be the economic consequences? Completely, trace the effects through our
basic model. Show and briefly describe the consequences on wage rates, GDP, employment
(man hours), interest rates, investment, and the price level. (7 points)
Labor market – increase in wages, decrease in employment
Production function – decrease in employment – decrease in Real GDP
Equation of exchange – increase in real gdp – decrease in inflation
Loanable funds mkt – unclear (wages go up but less hours worked)