Question 1

Which of the following best describes the Classical Dichotomy in macroeconomics?

Accepted Answer

It states that real variables are independent of nominal variables, so changes in the price level do not affect real output or employment.

Question 2

Suppose the production function for an economy is given by $$Y = A K$$^{0.3}$$ N$$^{0.7}$$. If A$ increases due to a technological innovation, what is the immediate effect on output Y$ and the marginal product of labor (MPN)?

Accepted Answer

Both output $$Y$$ and the marginal product of labor (MPN) increase.

Question 3

A firm is considering hiring an additional worker. According to the classical model, the firm will hire the worker if:

Accepted Answer

The marginal product of labor times the price of output is greater than or equal to the nominal wage: $$MPN 	imes P \geq W$$

Question 4

If the real wage ($$\frac{W}{P}) is $$above the equilibrium level in the labor market, what will happen according to the classical model?

Accepted Answer

There will be an excess supply of labor (unemployment), and the real wage will fall toward equilibrium.

Question 5

Which of the following would cause a rightward shift in the labor demand curve?

Accepted Answer

An increase in the capital stock, $$K$$

Question 6

Suppose a country experiences a negative supply shock, such as a sudden increase in oil prices. According to the classical model, what is the likely effect on the marginal product of labor (MPN) and the labor demand curve?

Accepted Answer

The marginal product of labor (MPN) decreases, shifting the labor demand curve to the left.

Question 7

If an individual wins the lottery, which effect is most likely to influence their labor supply decision according to the classical model?

Accepted Answer

A pure income effect, leading to a decrease in labor supply.

Question 8

The labor supply curve is upward sloping because:

Accepted Answer

A higher real wage increases the opportunity cost of leisure, encouraging more people to work.

Question 9

Which of the following would shift the labor supply curve to the right?

Accepted Answer

An increase in the working-age population due to immigration.

Question 10

According to Okun's Law, what is the relationship between the output gap and the unemployment rate?

Accepted Answer

A 1% increase in the unemployment rate is associated with a 2% decrease in output relative to potential.

Question 11

If the nominal wage $$W$$ increases by 10% and the price level $$P$$ also increases by 10%, what happens to the real wage $$\frac{W}{P}$$ and the level of employment in the classical model?

Accepted Answer

The real wage $$\frac{W}{P}$$ remains unchanged, and employment stays at the full employment level.

Question 12

A temporary increase in the real wage due to a one-day bonus is most likely to cause:

Accepted Answer

A pure substitution effect, leading to an increase in labor supplied for that day.

Question 13

Which of the following is NOT an assumption of the classical model of the labor market?

Accepted Answer

Wages and prices are sticky in the short run.

Question 14

If the marginal product of labor (MPN) is given by $$MPN = 0.7 \frac{Y}{N}$$, and the real wage is $$\frac{W}{P}$$, what is the equilibrium condition for labor demand?

Accepted Answer

$$MPN = \frac{W}{P}$$

Question 15

Suppose the government introduces a regulation that reduces total factor productivity $$A. $$What is the likely effect on the production function and output?

Accepted Answer

The production function shifts downward, and output decreases for any given levels of $$K$$ and $$N.$$

Question 16

Which of the following best explains why the labor demand curve is downward sloping?

Accepted Answer

As the real wage increases, the marginal product of labor falls, so firms demand less labor.

Question 17

If the working-age population increases due to a higher birth rate, what is the likely effect on the labor market equilibrium?

Accepted Answer

The labor supply curve shifts right, leading to a lower real wage and higher employment.

Question 18

A beneficial supply shock, such as a major technological breakthrough, will have which of the following effects in the classical model?

Accepted Answer

It increases the marginal product of labor, shifting the labor demand curve to the right.

Question 19

In the classical model, what is the effect of an increase in expected future real wages on current labor supply?

Accepted Answer

Current labor supply decreases, shifting the labor supply curve to the left.

Classical Model: Output and Employment in Macroeconomics

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