ECON 312 - Homework 6 (Ch 3)

In the classical model with fixed income, a reduction in the government budget deficit will lead to a: (A) higher real interest rate. (B) lower real interest rate. (C) higher level of output. (D) lower level of output.

(B) lower real interest rate.

The real wage is the return to labor measured in: (A) dollars. (B) units of output. (C) units of labor. (D) units of capital.

(B) units of output.

Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be: (A) 240. (B) 700. (C) 760. (D) 970.

(C) 760.

If bread is produced using a constant returns to scale production function, then if the: (A) number of workers is doubled, twice as much bread will be produced. (B) amount of equipment is doubled, twice as much bread will be produced. (C) amounts of equipment and workers are both doubled, twice as much bread will be produced. (D) amounts of equipment and workers are both doubled, four times as much bread will be produced.

(C) amounts of equipment and workers are both doubled, twice as much bread will be produced.

A consumption function shows the relationship between consumption and: (A) income. (B) personal income. (C) disposable income. (D) taxes.

(C) disposable income.

The neoclassical theory of distribution explains the allocation of: (A) output between goods and services. (B) output among consumption, investment, and government spending. (C) income among factors of production. (D) income between saving and investment.

(C) income among factors of production.

National saving refers to: (A) disposable income minus consumption. (B) taxes minus government spending. (C) income minus consumption minus government purchases. (D) income minus investment.

(C) income minus consumption minus government purchases.

In a classical economy, assume that the government lowers both government spending and taxes by $100 billion. If the marginal propensity to consume is 0.6, investment will: (A) rise by $100 billion. (B) rise by $60 billion. (C) rise by $40 billion. (D) not change.

(C) rise by $40 billion.

Other things equal, an increase in the interest rate leads to: (A) a decrease in the quantity of investment goods demanded. (B) no change in the quantity of investment goods demanded. (C) an increase in the quantity of investment goods demanded. (D) sometimes an increase and sometimes a decrease in the quantity of investment goods demanded.

(A) a decrease in the quantity of investment goods demanded.

Unlike the real world, the classical model with fixed output assumes that: (A) capital and labor are fully utilized. (B) all capital is fully utilized, but some labor is unemployed. (C) all labor is fully employed, but some capital lies idle. (D) some capital lies idle, and some labor is unemployed.

(A) capital and labor are fully utilized.

All of these actions increase government purchases of goods and services EXCEPT the: (A) federal government sending a Social Security check to a retired firefighter. (B) federal government sending a paycheck to the president of the United States. (C) federal government buying weapons (D) city of Boston buying a library book.

(A) federal government sending a Social Security check to a retired firefighter.

According to the model developed in Chapter 3, when government spending increases but taxes stay the same, interest rates: (A) increase. (B) are unchanged. (C) decrease. (D) can vary.

(A) increase.

The factor that makes national saving equal investment, in equilibrium, is: (A) the interest rate. (B) private saving. (C) public saving. (D) fiscal policy.

(A) the interest rate.

The marginal product of labor is: (A) output divided by labor input. (B) additional output produced when one additional unit of labor is added. (C) additional output produced when one additional unit of labor and one additional unit of capital are added. (D) value of additional output when one dollar's worth of additional labor is added.

(B) additional output produced when one additional unit of labor is added.

Crowding out occurs when an increase in government spending _____ the interest rate and investment _____. (A) increases; increases (B) increases; decreases (C) decreases; increases (D) decreases; decreases

(B) increases; decreases

In a classical model with fixed factors of production and flexible prices, the amount of consumption spending depends on _____, the amount of investment spending depends on _____, and the amount of government spending is determined _____. (A) the interest rate; disposable income; by tax revenue (B) the real wage; the real rental price of capital; by factor prices (C) labor's share of output; capital's share of output; by the interest rate (D) disposable income; the interest rate; exogenously

(D) disposable income; the interest rate; exogenously

The real interest rate is the: (A) rate of interest actually paid by consumers. (B) rate of interest actually paid by banks. (C) rate of inflation minus the nominal interest rate. (D) nominal interest rate minus the rate of inflation.

(D) nominal interest rate minus the rate of inflation.