Question 1

In the closed-economy one-period (CEOP) macroeconomic model, what is the definition of a competitive equilibrium?

Accepted Answer

A state where all agents maximize utility and profit, and all markets clear.

Question 2

According to the First Welfare Theorem, what is the relationship between competitive equilibrium and Pareto efficiency in the CEOP model?

Accepted Answer

Competitive equilibrium allocations are always Pareto efficient under ideal conditions.

Question 3

Suppose total factor productivity (TFP) increases in the CEOP model. Which of the following best describes the income effect?

Accepted Answer

Consumers can afford more leisure because their income rises.

Question 4

Which formula represents the after-tax wage when a labor income tax rate $	au$ is imposed?

Accepted Answer

$w(1 - 	au)$

Question 5

What is the main implication of sticky wages and prices in the CEOP model?

Accepted Answer

Macroeconomic policy can affect real outcomes, such as unemployment.

Question 6

If a distorting labor income tax is introduced, what happens to the marginal rate of substitution (MRS) and the marginal product of labor (MPL)?

Accepted Answer

A wedge is created between MRS and MPL.

Question 7

Which of the following is an exogenous variable in the CEOP model?

Accepted Answer

Total factor productivity (TFP)

Question 8

In the CEOP model, what is the substitution effect when productivity increases?

Accepted Answer

Higher wages make leisure more expensive, encouraging more labor supply.

Question 9

Which equation best represents the decomposition of labor supply change into income and substitution effects?

Accepted Answer

$\Delta L = \Delta L_{income} + \Delta L_{substitution}$

Question 10

If wages are fixed and a negative demand shock occurs, what is the likely outcome in the CEOP model?

Accepted Answer

Unemployment increases because wages do not adjust.

Question 11

Which scenario justifies policy intervention in the CEOP model?

Accepted Answer

Presence of market imperfections such as sticky wages or externalities.

Question 12

A government introduces a labor income tax. What is the expected effect on labor supply and output?

Accepted Answer

Both labor supply and output decrease compared to the no-tax equilibrium.

Question 13

Which of the following best describes a Pareto optimum?

Accepted Answer

An allocation where no one can be made better off without making someone else worse off.

Question 14

In the CEOP model, what is the role of comparative statics?

Accepted Answer

To analyze how equilibrium changes in response to exogenous shocks.

Question 15

Which of the following is NOT a characteristic of competitive equilibrium in the CEOP model?

Accepted Answer

Government intervention is required to clear markets.

Question 16

If the government removes a distorting labor income tax, what happens to the wedge between the marginal rate of substitution and the marginal product of labor?

Accepted Answer

The wedge disappears, and MRS equals MPL.

Question 17

Which of the following is a real-world implication of sticky wages and prices?

Accepted Answer

Unemployment can persist after a negative demand shock.

Question 18

In the CEOP model, what happens to labor supply when the after-tax wage decreases due to a higher tax rate $	au$?

Accepted Answer

Labor supply decreases.

Question 19

Which concept explains why policy interventions may be needed in the CEOP model with sticky wages and prices?

Accepted Answer

Markets do not clear instantly, leading to inefficiency and unemployment.

Question 20

Which of the following best describes the effect of an exogenous shock, such as a sudden increase in TFP, on the CEOP model?

Accepted Answer

Equilibrium output increases, and labor supply may change due to income and substitution effects.

Study Guide: Closed-Economy One-Period Macroeconomic Model (CEOP)

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