Chapter 3 Summary

The investment function slopes _____ because there are _____ investment projects that are profitable as the interest rate decreases. a. downward; more b. upward; fewer c. downward; fewer d. upward; more

a. downward; more

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given level of disposable income. This shift, in a neoclassical economy, will: a. lower investment and raise the interest rate. b. raise investment and lower the interest rate. c. lower both investment and the interest rate. d. raise both investment and the interest rate.

a. lower investment and raise the interest rate.

Assume that consumption does not depend on the interest rate. Holding other things constant, when the government lowers taxes on business investment, thus increasing investment demand, the quantity of investment: a. increases and the real interest rate rises. b. is unchanged and the real interest rate rises. c. and the real interest rate are both unchanged. d. decreases and the real interest rate rises.

b. is unchanged and the real interest rate rises.

National saving is: a. private saving. b. private saving plus public saving. c. private saving minus public saving. d. public saving.

b. private saving plus public saving.

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving: a. rises by $60 billion. b. rises by $40 billion. c. falls by $40 billion. d. falls by $60 billion.

c. falls by $40 billion.

Private saving is: a. income minus consumption minus government spending. b. disposable income minus government spending. c. taxes minus government spending. d. disposable income minus consumption.

d. disposable income minus consumption.

Crowding out occurs when an increase in government spending _____ the interest rate and investment _____. a. decreases; decreases b. increases; increases c. decreases; increases d. increases; decreases

d. increases; decreases

In the classical model with fixed output, the supply and demand for goods and services are balanced by: a. taxes. b. fiscal policy. c. government spending. d. the interest rate.

d. the interest rate.

In the classical model with fixed income, if households and the government want to save more than firms want to invest, then: a. the real interest rate rises. b. output falls. c. output increases. d. the real interest rate falls.

d. the real interest rate falls.