Chapter 6 - Markets, Prices, Supply and Demand

Name:

True/False
Indicate whether the statement is true or false.

Bond holdings and interest income are zero for the whole economy.

The household real budget constraint shows that household real consumption is equal to household real income plus household real saving.

In the Barro model prices like the real wage adjust to clear markets like the labor market.

In the Barro model the nominal rate of return on capital, (R/P) -

is greater than the nominal return on bonds, i, because capital is viewed by households as more risky than bonds.

Real profit equals real output plus spending on capital and labor inputs.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

The market clearing approach assumes that:

a.	people are not able to affect prices that influence their decisions.
b.	prices adjust to clear markets.
c.	firms are not able to affect prices that influence their decisions.
d.	all of the above.

The market clearing approach assumes that:

a.	people are not able to affect prices that influence their decisions.
b.	prices change very slowly.
c.	firms are able to affect prices that influence their decisions.
d.	all of the above.

The market clearing approach assumes that:

a.	people are able to affect prices that influence their decisions.
b.	prices adjust to clear markets.
c.	firms are able to affect prices that influence their decisions.
d.	all of the above.

The market clearing approach assumes that:

a.	people are able to affect prices that influence their decisions.
b.	prices change very slowly.
c.	firms are not able to affect prices that influence their decisions.
d.	all of the above.

10.

The labor market clears when:

a.	the real wage causes L^S = L^D.
b.	the real wage causes L^Sto be minimized.
c.	the marginal product of labor is zero.
d.	the real wage causes L^Sto be as large as possible.

11.

In the goods market in the Barro model households can buy:

a.	bonds.
b.	goods to increase their stock of capital.
c.	labor services.
d.	all of the above.

12.

The goods market the price, P, is:

a.	the price level.
b.	the rental price of goods.
c.	the price of a particular good.
d.	the interest rate.

13.

In the rental market in the Barro model, households buy and sell:

a.	real estate.
b.	consumer durables like cars.
c.	the use of capital for one period.
d.	all of the above.

14.

A bond that is traded in the bond market in the Barro model is piece of paper that:

a.	is the lenders claim to the amount owed by the borrower.
b.	is the borrowers claim to the amount owed by the lender.
c.	is the lenders claim to ownership in the company.
d.	assures the person is who they say they are.

15.

Money in the Barro model is held because:

a.	for its own sake.
b.	to trade fairly soon for something else.
c.	to earn interest.
d.	all of the above.

16.

Money in the Barro model is:

a.	gold.
b.	a medium of exchange.
c.	interest earning.
d.	all of the above.

17.

One unit of money in the Barro model has a purchasing power of:

a.	the price level time that one unit, P.
b.	the price level over the interest rate, (P/i).
c.	the interest rate, i.
d.	one over the price level, (1/P)

18.

If a household has $2,000 in money and the price level is 10, then the real value of its money is:

a.	$10.
b.	$20,000.
c.	200 goods.
d.	1,900 goods.

19.

The real wage is:

a.	hourly earning after taxes.
b.	wages plus fringe benefits.
c.	the value of a worker’s time in goods received.
d.	the price level divided by the nominal wage rate.

20.

If the nominal wage rate is $10 per hour and the price level is 2, then the real wage a worker earns is:

a.	five units of goods per hour.
b.	eight units of goods per hour.
c.	twenty units of goods per hour.
d.	one-fifth unit of goods per hour.

21.

If the rental price of a capital good is $100 and the price level is 25, then when renting the capital the owner’s real earnings are:

a.	4 units of output per period.
b.	2,500 units of output per period.
c.	seventy five units of output per period.
d.	one-forth unit of output per period.

22.

The rental price of capital is:

a.	a dollar amount per unit of capital.
b.	a real interest rate.
c.	a nominal interest rate
d.	profit.

23.

Over all households bonds, B, must total zero because:

a.	there are no bonds in the model.
b.	for every dollar loaned a dollar is borrowed in the bond market.
c.	bonds are not important in the model.
d.	bonds are illegal in most economies.

24.

The profit in the model is:

a.	output - (wages times labor hired + the rental price times capital rented).
b.	(price times output) divided by (wages times labor hired + the rental price times capital rented).
c.	(price times output) - (wages times labor hired + the rental price times capital rented).
d.	(wages times labor hired + the rental price times capital rented) - (price times output).

25.

The rate of return from owning capital is:

a.	the rental price of capital, R.
b.	the value of depreciation, PK.
c.	the net nominal rental income, (R/P)•PK - PK.
d.	the real rental price less depreciation, (R/P) - .

26.

The principal of a bond is:

a.	the amount of interest paid each period.
b.	the initial amount borrowed.
c.	the amount of interest paid over the term of the bond.
d.	the total amount to be paid back including the amount borrow and the amount of interest paid over the term of the bond.

27.

The maturity of a bond is:

a.	the amount of interest paid each period.
b.	the amount borrowed.
c.	the amount of interest paid over the term of the bond.
d.	the time at which the lender must be paid back.

28.

If the principal of a bond is $100, it matures in a year and the interest rate is 4%, then at the interest payment on this bond will be:

a.	$100.
b.	$96.
c.	$4.
d.	$400.

29.

If the principal of a bond is $1000, it matures in a year and the interest rate is 6%, then at the end of the year the lender will receive:

a.	$1000.
b.	$1060.
c.	$60.
d.	$940.

30.

In the market clearing model, for the whole economy interest income is:

a.	bonds minus the interest rate.
b.	zero.
c.	the interest rate divided by bonds.
d.	bonds divided by the interest rate.

31.

Individual household nominal income includes:

a.	nominal interest income, iB.
b.	nominal net rental income, [(R/P) - PK]•PK.
c.	nominal wage income, wL.
d.	all of the above.

32.

In the model the nominal interest rate equals the nominal net return on capital, i = (R/P) -

, because:

a.	other than rates of return bonds and capital look the same to households as assets.
b.	capital is riskier than bonds.
c.	bonds are riskier than capital.
d.	bonds are zero in the aggregate.

33.

In the model the nominal interest rate equals the nominal net return on capital, i = (R/P) -

, because:

a.	bonds are zero in the aggregate.
b.	capital is riskier than bonds.
c.	bonds are riskier than capital.
d.	if bonds offered a higher return than capital households would hold no capital.

34.

According to the household nominal budget constraint,

, households can use their income to:

a.	purchase consumption goods.
b.	acquire more bonds.
c.	purchase capital goods.
d.	all of the above.

35.

Interest income is:

a.	positive for net bond holders.
b.	zero for the whole economy.
c.	negative for net bond issuers.
d.	all of the above.

36.

According to the household nominal budget constraint, PC+

B+P•

K =

+ wL + i(B + PK), households can use their income to:

a.	purchase consumption goods.
b.	hire more workers.
c.	acquire more money.
d.	all of the above.

37.

According to the household nominal budget constraint,

, households can use their income to:

a.	acquire more money.
b.	acquire more bonds.
c.	pay more wages.
d.	all of the above.

38.

According to the household nominal budget constraint,

, households can use their income to:

a.	hire more workers.
b.	acquire more money.
c.	purchase capital goods.
d.	all of the above.

39.

If a household this week produces 20 of its product at a cost of 50 cents each, sells them for $1, works 40 hours at $10 per hour, must pay $10 in interest owed on its borrowing and rents out 10 units of capital at $100 for the week, the household’s, nominal income is:

a.	$1,440 this week.
b.	$1,400 this week.
c.	$1,420 this week.
d.	none of the above.

40.

The household real budget constraint

.
shows that in our model:

a.	households get income only from labor.
b.	households can spend their income on consumption or acquiring more capital and bonds.
c.	households can spend their income only on consumption.
d.	households view bonds as riskier than capital.

41.

The household’s budget constraint shows that:

a.	sources of fund = uses of funds.
b.	profits are the largest part of income
c.	labor income is the largest part of income.
d.	consumption is the largest part of spending.

42.

The household real budget constraint

.
shows that in our model:

a.	households get income only from labor.
b.	households can spend their income only on consumption.
c.	households get income from profits from production, labor and interest on bonds and capital.
d.	households view bonds as riskier than capital.

43.

To maximize profit a firm should hire labor:

a.	until it can produce no more of its product.
b.	until the marginal product of labor begins to fall.
c.	until the marginal product of labor equal the real wage rate.
d.	until the marginal product of labor is zero.

44.

An investment in the Barro model is:

a.	the purchase of a bond.
b.	the purchase of ownership in a firm.
c.	the purchase of a capital good used for production.
d.	all of the above.

45.

To maximize profit a firm should hire capital:

a.	until it can produce no more of its product.
b.	until the marginal product of labor begins to fall.
c.	until the marginal product of capital equal the real rental price of capital.
d.	until the marginal product of capital is zero.

46.

In the market for capital services:

a.	the supply of capital adjusts to create market clearing.
b.	the real rental price of capital adjusts to create market clearing.
c.	the demand for capital adjusts to create market clearing.
d.	all of the above.

47.

In the market clearing model, depreciation,

, is:

a.	the rate at which capital disappears.
b.	the rate at which money loses value.
c.	the rate at which bonds lose value.
d.	all of the above.

48.

In the market clearing model:

a.	households can owe pay interest.
b.	households can earn interest.
c.	for the whole economy interest income is zero.
d.	all of the above.

49.

In the market clearing model, nominal saving is:

a.	the change in money + the change in bonds + the change in the nominal value of capital.
b.	nominal income less nominal consumption.
c.	.
d.	all of the above.

50.

In the market clearing model, nominal saving is:

a.	the change in money + the change in bonds.
b.	nominal income plus nominal consumption.
c.	.
d.	all of the above.

51.

In the market clearing model, nominal saving is:

a.	always zero.
b.	nominal income less nominal consumption.
c.	nominal income - depreciation of capital.
d.	all of the above.

52.

In the market clearing model, nominal saving is:

a.	the change in money + the change in bonds + the change in the nominal value of capital.
b.	nominal income plus nominal saving.
c.	always zero.
d.	all of the above.

53.

Real saving is:

a.	.
b.	output plus consumption.
c.	.
d.	all of the above.

	Figure 6.1

54.

In Figure 6.1 an increase in real income is shown by:

a.	a shift of the curve up and to the right.
b.	rotating the curve out the real consumption axis.
c.	a shift of the curve inward and to the left.
d.	rotating the curve up the real saving axis.

55.

In the market clearing model, the demand for capital and labor come from:

a.	the tastes of people.
b.	rental and labor markets.
c.	the objective of profit maximizing.
d.	all of the above.

Short Answer

56.

How is profit calculated in the model?

57.

What is the household real budget constraint and what does it tell us?

58.

In the model why does the return on bonds, i, equal the return on capital, (R/P) -

59.

What is real profit in the Barro model?

60.

What causes the labor and capital markets to clear in the Barro model?