________________________ Name: Class: ___________________ Date: __________
ID: A
ECON 2102 Macroeconomics 2 - Tutorial 5: Markets, Prices, Supply, and Demand
True/False
Indicate whether the statement is true or false.
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1. Bond holdings and interest income are zero for the whole economy.
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2. 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.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
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3. 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.
4. 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.
5. 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.
6. 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.
7. Money in the Barro model is:
a. gold.
b. a medium of exchange.
c. interest earning.
d. all of the above.
8. 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)
9. The real wage is:
a. hourly earning after taxes.
b. wages plus fringe benefits.
c. the value of a workers time in goods received.
d. the price level divided by the nominal wage rate.
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Name: ________________________
ID: A
____ 10. 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.
____ 11. 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) - times (price output).
____ 12. 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) - .
____ 13. 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.
____ 14. 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. acquire more bonds.
c. purchase capital goods.
d. all of the above.
____ 15. 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.
____ 16. According to the household nominal budget constraint, PC+ B+PK = + 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.
____ 17. 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.
____ 18. 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.
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Name: ________________________
ID: A
____ 19. 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.
____ 20. 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.
Short Answer
21. How is profit calculated in the model?
22. What is the household real budget constraint and what does it tell us?
23. In the model why does the return on bonds, i, equal the return on capital, (R/P) - ?
24. What is real profit in the Barro model?
25. What causes the labor and capital markets to clear in the Barro model?
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