Q: Suppose the money wage rate is $20 per hour and the GDP deflator is 200. What is the real wage rate?

$$ \frac{20}{200} \times 100 = 10 $$ dollars per hour

Q: If the marginal product of labor is $$40 per hour when labor increases from 100 to 200 billion hours, and 30 $$per hour when labor increases from 200 to 300 billion hours, what is the total increase in real GDP from 100 to 300 billion hours?

$$ (100 \times 40) + (100 \times 30) = 4000 + 3000 = 7000 $$ billion

Question 1

Which of the following best describes the relationship shown by the production possibility frontier (PPF) between leisure and real GDP in the classical model?

Accepted Answer

The PPF is bowed out, indicating increasing opportunity cost as more leisure is forgone to produce real GDP.

Question 2

Suppose the money wage rate is $20 per hour and the GDP deflator is 200. What is the real wage rate?

Accepted Answer

$$ \frac{20}{200} 	imes 100 = 10 $$ dollars per hour

Question 3

If the marginal product of labor decreases as more labor is employed, which economic law is being illustrated?

Accepted Answer

The law of diminishing returns

Question 4

A firm hires workers up to the point where:

Accepted Answer

The marginal product of labor equals the real wage rate

Question 5

If the labor market is in equilibrium at a real wage rate of $35 and 200 billion labor hours, what is true about the economy?

Accepted Answer

The economy is at full employment and producing potential GDP.

Question 6

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

Accepted Answer

An increase in the working-age population

Question 7

If the real wage rate is set above the equilibrium wage due to a minimum wage law, what is the likely result?

Accepted Answer

A surplus of labor and an increase in the natural rate of unemployment

Question 8

Which of the following is NOT a component of national saving?

Accepted Answer

Foreign saving

Question 9

If gross investment is $$500 billion and depreciation is 200 $$billion, what is net investment?

Accepted Answer

$$ 500 - 200 = 300 $$ billion

Question 10

Which of the following factors would increase the supply of saving?

Accepted Answer

An increase in the real interest rate

Question 11

If the real interest rate is above its equilibrium level, what will happen in the market for loanable funds?

Accepted Answer

There will be a surplus of saving and the real interest rate will fall.

Question 12

Which of the following best explains why the labor supply curve is relatively steep?

Accepted Answer

A large percentage increase in the real wage rate brings only a small percentage increase in the quantity of labor supplied.

Question 13

Which of the following would shift the production function upward?

Accepted Answer

An advance in technology

Question 14

If the marginal product of labor is $$40 per hour when labor increases from 100 to 200 billion hours, and 30 $$per hour when labor increases from 200 to 300 billion hours, what is the total increase in real GDP from 100 to 300 billion hours?

Accepted Answer

$$ (100 	imes 40) + (100 	imes 30) = 4000 + 3000 = 7000 $$ billion

Question 15

Which of the following is a likely effect of more generous unemployment compensation?

Accepted Answer

An increase in the duration of job search and a higher natural rate of unemployment

Question 16

Which of the following would NOT increase labor productivity?

Accepted Answer

A decrease in physical capital

Question 17

If the expected profit rate increases, what happens to investment demand?

Accepted Answer

Investment demand increases

Question 18

Which of the following is an example of job rationing?

Accepted Answer

A firm paying an efficiency wage above the equilibrium wage

Question 19

If an increase in population raises the supply of labor, what happens to the equilibrium real wage rate and potential GDP per hour of work?

Accepted Answer

The equilibrium real wage rate falls and potential GDP per hour of work decreases.

Question 20

Which of the following best describes the effect of an increase in labor productivity on the labor market?

Accepted Answer

The demand for labor shifts right, increasing the real wage rate, quantity of labor, and potential GDP.

The Classical Model: Full Employment, Labor Market, and Productivity

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