Question 1

In the static, closed-economy macroeconomic model, which of the following is an exogenous variable?

Accepted Answer

Government spending $$G$$

Question 2

Which equation represents the government budget constraint in equilibrium?

Accepted Answer

$$G = T$$

Question 3

If the labor market clears in the static model, what does Walras’ Law imply about the goods market?

Accepted Answer

The goods market will also clear automatically.

Question 4

Given the production function $$Y = zF(K, N)$$, what does the slope of the function with respect to $$N$$ represent?

Accepted Answer

Marginal product of labor (MPN)

Question 5

In the model, what happens to consumption $$C$$ and leisure $$l$$ when government spending $$G$$ increases?

Accepted Answer

Both $$C$$ and $$l$$ decrease

Question 6

Which of the following best describes the effect of an increase in total factor productivity $$z in $$the model?

Accepted Answer

Output $$Y$$ increases, real wage $$w$$ increases

Question 7

Which condition must hold in equilibrium for the consumer’s optimization problem?

Accepted Answer

$$MRSl,C = w$$

Question 8

What is the marginal rate of transformation (MRT) between leisure and consumption in this model?

Accepted Answer

$$MRT_{l,C} = MPN$$

Question 9

Which of the following is NOT a reason why the welfare theorems might fail in the real world?

Accepted Answer

Competitive markets

Question 10

Suppose the government imposes a proportional labor income tax $$t. $$What is the consumer’s budget constraint?

Accepted Answer

$$C = w(1 - t)(h - l) + \pi$$

Question 11

In the competitive equilibrium with a proportional labor income tax, which relationship holds?

Accepted Answer

$$w(1 - t) = MRSl,c \u003c w = MPN = MRTl,c$$

Question 12

Which of the following is true about the effect of a proportional labor income tax compared to a lump-sum tax?

Accepted Answer

Consumption is lower under a proportional labor income tax

Question 13

If the production function is $$Y = zF(K, N)$$ and $$z$$ increases, what happens to the marginal product of labor (MPN)?

Accepted Answer

MPN increases for each $$N$$

Question 14

Which of the following is a prediction of the model when government spending $$G$$ increases?

Accepted Answer

Consumption $$C is $$counter-cyclical

Question 15

In the social planner’s problem, what is the criterion for Pareto optimality?

Accepted Answer

No way to rearrange production or reallocate resources such that someone is made better off without making someone else worse off

Question 16

Which equation describes the production possibilities frontier (PPF) in terms of consumption and leisure?

Accepted Answer

$$C = zF(K, h - l) - G$$

Question 17

If the consumer’s utility function is $$u(c, \ell) = \log(c) + A\ell$$, what is the optimal consumption under a lump-sum tax?

Accepted Answer

$$c = wA$$

Question 18

Which of the following is a key business cycle fact explained by fluctuations in total factor productivity according to the model?

Accepted Answer

Real wage $$w is $$pro-cyclical

Question 19

In the model, what is the effect of an increase in government spending $$G on $$the real wage $$w$$?

Accepted Answer

The real wage $$w$$ decreases

Static One-Period Macroeconomic Model with Government: Equilibrium, Efficiency, and Policy Effects

Study Guide - Practice Questions