Part I (50%) - Multiple Choice (2% each). On a scantron form, mark the single best answer. Put your name on the scantron, and turn it in with this exam. You have 50 minutes to complete this exam, and you may use a calculator.
 

1. The Phillips curve:
a) is negatively sloped, indicating that when unemployment rises, wage inflation rises.
b) Is negatively sloped, indicating that when unemployment rises, wage inflation falls.
c) Is horizontal, indicating that when unemployment rises, wage inflation is unchanged.
d) Is positively sloped, indicating that when unemployment rises, wage inflation rises.

2. The rate of unemployment at which the rate of inflation will be constant is called the:
a) stable rate of unemployment.
b) expectations augmented rate of unemployment.
c) equilibrium rate of unemployment.
d) natural rate of unemployment.

3. If expectations are formed rationally:
a) there is no short-run expectations-augmented Phillips curve.
b) there is no long-run Phillips curve.
c) the long-run Phillips curve is applicable relatively quickly.
d) it is impossible to reduce unemployment below the natural rate.

4. If the economy is at full employment, with output growing at 2 percent per year, prices rising at 5 percent per year, and an annual increase in the money supply of less than 7 percent:
a) excess supply of money will reduce the interest rate, reducing investment and aggregate demand and increasing inflation.
b) excess demand for money will reduce the interest rate, reducing investment and aggregate demand and increasing inflation.
c) excess supply of money will increase the interest rate, reducing investment and aggregate demand and dampening inflation.
d) excess demand for money will increase the interest rate, reducing investment and aggregate demand and dampening inflation.

5. If the government tries to keep unemployment below the NAIRU:
a) inflation will increase.
b) inflation will decrease.
c) there will be no effect on inflation.
d) there will be stagflation.

6. When the government tries to reduce the non-accelerating-inflation rate of unemployment by increasing job mobility, it is operating primarily to reduce:
a) voluntary unemployment.
b) structural unemployment.
c) frictional unemployment.
d) cyclical unemployment.

7. Efficiency wages are advocated as a solution to the problem of adverse selection, that is, as a solution to the problem that, when the firm:
a) raises the wage, its best workers leave the firm.
b) Lowers the wage, its best workers leave the firm
c) Lowers the wage, its workers quit randomly.
d) Lowers the wage, its worst workers leave the firm.

8. In a recession, when there is reduced demand for labor, we often observe:
a) lower employment without a reduction in the real wage.
b) lower employment and lower real wage.
c) no change in employment or the real wage.
d) higher employment and a lower real wage.

9. The understandings that develop between workers and employers over time are referred to as:
a) COLA clauses.
b) union contracts.
c) implicit contracts.
d) insurance policies.

10. Insider-outsider theory focuses on:
a) efficiency wages.
b) Training costs.
c) Minimum wage laws.
d) Implicit contracts.

11. If is frequently claimed that efficiency wages discourage shirking. All of the following, except one, are reasons advanced for this. Which is the odd one out?
a) Efficiency wages make shirking more costly for the worker since his next best alternative is less well paid.
b) Efficiency wages coexist with unemployment.
c) Efficiency wages make shirking more costly for the worker since his next best alternative may be unemployment.
d) Efficiency wages provide insurance for workers in the event of a downturn.

12. Which of the following schools of macroeconomic thought argues that government can and should stabilize the economy using fiscal and monetary policy?
a) new Keynesians
b) real business cycle theorists
c) monetarists
d) new classical economists

13. The idea that actions of rational individuals offset the impact of government actions is association with:
a) New Keynesianism.
b) real business cycle theory.
c) New classical macroeconomics.
d) Monetarism.

14. Which of the following might reduce the NAIRU by shifting aggregate supply to the right?
a) moral suasion
b) a fixed rule mandating steady money growth
c) unemployment insurance
d) policies that promote labor mobility

15. The New Keynesians view is that economic fluctuations are:
a) due to endogenous forces and predictable.
b) Due to exogenous shocks but are amplified and made persistent by the economic system.
c) Due to random, exogenous shocks and unpredictable.
d) Chiefly due to misguided monetary and fiscal policy.

16. Since 1960 productivity growth in the United States has generally:
a) been increasing.
b) Remained relatively constant.
c) Fluctuated around the long-term average.
d) Been declining.

17. Four factors contribute to productivity growth. Which of the following is not one of the four factors?
a) increases in the size of the labor force
b) savings and investment
c) education and the quality of the labor force
d) reallocating resources from low to high productivity sectors.

18. All of the following, except one, are possible reasons for the decline in personal savings over the past 20 to 25 years. Which is the odd one out?
a) improved student loan programs
b) Improved social security
c) Decreased real after-tax return on assets
d) Improved insurance

19. A student's investment in education is an investment in:
a) research and development.
b) Human capital.
c) Physical capital.
d) The stock market.

20. Which of the following is not a strength of the U.S. educational system?
a) the high percentage of students choosing majors in science and technology
b) the absence of early tracking of students in lower grades
c) the relatively open system of junior colleges and state universities
d) the research universities

21. The federal budget deficit is:
a) The total amount of money the federal government owes to members of the public.
b) The difference between the total value of imports and the total value of exports.
c) The total amount of foreign borrowing undertaken by the federal government.
d) The difference between what the federal government spends in any year and what it receives in revenues.

22. All except one of the following are reasons that deficit reduction will continue to be difficult in the future. Which is the odd one out?
a) Entitlements to Medicare are likely to grow.
b) The number of elderly in the U.S. population will grow.
c) Defense expenditures are likely to grow.
d) Health care costs are likely to grow.

23. Government borrowing to finance the deficit:
a) crowds out both foreign and U.S. private investment.
b) Crowds out U.S. private investment by raising the interest rate but causes increased foreign investment.
c) Crowds out foreign investment by increasing the exchange rate but has no effect on U.S. private investment.
d) Attracts foreign investment, and the extra competition leads to increases U.S. private investment.

24. An increase in taxes to finance higher government spending reduces disposable income, which discourages both consumption and saving. The reduction in saving leads to a higher real rate of interest and lower investment. The offsetting impact on consumption and investment of the higher government expenditure is referred to as:
a) Crowding out.
b) market failure.
c) A public good.
d) Capital deepening.

25. Which of the following did not contribute to the increases in the federal budget deficit in the 1980s?
a) declines in federal taxes
b) increases in foreign aid
c) higher interest payments
d) higher defense spending

Part II (50%) - Problems and Graphs.Label your graphs carefully, but don't worry about drawing your graphs to precise scale. Use the back of the page if necessary, noting where your answer continues.

1. (16%) Using the expectations-augmented Phillips curve:

a) (4%) Illustrate what happens to the unemployment rate (relative to NAIRU) when individuals and firms underestimate the inflationary impact of a government monetary stimulus. 

b) (4%) Illustrate what happens to the unemployment rate if, after a few months, expectations adapt to the higher rate of inflation.

c) (4%) Illustrate what happens if individuals and firms rapidly adjust their inflation expectations too much.

d) (4%) What is the long-run Phillips curve? Show and explain.

2. (16%) Moe's Lawn Care has plenty of customers, but Moe finds that his workers don't always work as hard as they can. He drives around and tries to catch them napping, and if he does he fires them, but still the problem remains. Based on experience, however, he finds that wages affect their productivity. 

a) (4%) What do you expect the relationship of productivity to wage to look like? Show and explain.

b) (4%) How would Moe find the efficiency wage to pay his workers? Show and explain.

c) (4%) If Moe's competitors followed his lead, how would the efficiency wage affect the local labor market for mowers?

d) (4%) How would a recession affect the above worker productivity function, and how would this in turn affect the efficiency wage? Show and explain.

3. (6%) Suppose annual GDP is $7 trillion, the capital stock is $14 trillion, and the multiplier is 2.5. Trace through the impact of a $1 billion increase in government purchases through two rounds of the multiplier-accelerator model. Can this process continue unabated? Why or why not?

4. (6%) Using the Aggregate Demand/Aggregate Supply Model with a Short-Run Aggregate Supply curve, show the effect of a decrease in the money supply on output and the price level. How would your results be different if the money supply increased?

5. (6%) Using graphs of the aggregate product market and aggregate labor market, can you explain how an increase in the Labor Force Participation Rate (say, through more college students dropping out and looking for jobs) would affect a) the economic growth rate and b) average labor productivity?