Question 1

Which of the following best describes a competitive equilibrium in the closed-economy one-period (CEOP) macroeconomic model?

Accepted Answer

A situation where all markets clear and agents maximize their objectives given prices and constraints.

Question 2

In the CEOP model, what does it mean for the competitive equilibrium to be Pareto optimal?

Accepted Answer

No individual can be made better off without making someone else worse off.

Question 3

Suppose total factor productivity (TFP) increases in the CEOP model. Which of the following is a likely income effect?

Accepted Answer

Households may choose to consume more leisure because their real income has increased.

Question 4

Which equation represents the resource constraint in the CEOP model?

Accepted Answer

$Y = C + G$

Question 5

If a distorting labor income tax is introduced in the CEOP model, what is a likely effect?

Accepted Answer

Labor supply decreases, leading to lower output and welfare.

Question 6

How does the introduction of sticky wages and prices in the CEOP model affect macroeconomic policy?

Accepted Answer

It makes macroeconomic policy effective in influencing output and employment.

Question 7

Which of the following is NOT an exogenous variable in the standard CEOP model?

Accepted Answer

Household labor supply

Question 8

Given the production function $Y = A F(K, L)$, where $A$ is total factor productivity, what is the substitution effect of an increase in $A$?

Accepted Answer

Households substitute leisure for labor because the return to working increases.

Question 9

Which of the following best explains why the competitive equilibrium and the Pareto optimum are the same in the CEOP model?

Accepted Answer

Because all agents are price takers and markets are complete, leading to efficient allocation.

Question 10

If government spending increases in the CEOP model, holding everything else constant, what is the likely effect on private consumption?

Accepted Answer

Private consumption decreases due to the resource constraint.

Question 11

Suppose the government imposes a labor income tax $	au$ in the CEOP model. Which equation shows the after-tax wage received by workers?

Accepted Answer

$w_{after} = (1 - 	au)w$

Question 12

Which of the following scenarios would violate the definition of a competitive equilibrium in the CEOP model?

Accepted Answer

Households are unable to maximize utility due to price controls.

Question 13

If wages and prices are sticky, what is a possible consequence for the labor market in the CEOP model?

Accepted Answer

Unemployment may persist because wages do not adjust to clear the market.

Question 14

Which of the following is a direct effect of an increase in total factor productivity in the CEOP model?

Accepted Answer

Output increases for given levels of capital and labor.

Question 15

In the CEOP model, what is the effect of a labor income tax on the marginal rate of substitution between leisure and consumption?

Accepted Answer

It causes the marginal rate of substitution to differ from the marginal product of labor.

Chapter 5: A Closed-Economy One-Period Macroeconomic Model - Study Guide

Study Guide - Practice Questions