EOC3
Suppose that an economy's production function is Cobb-Douglas with parameter 𝛼=0.3. Capital and labor receive shares of income of ___ and ___ respectively.
0.3 and 0.7
The government raises taxes by $100 billion. Assuming the marginal propensity to consume is 0.6, identify the changes to public saving, private saving, national saving, and investment. Let Y = Income, C = Consumption, I = Investment, G = Government Purchases, and T = Taxes. Public saving is defined as ____
T - G
The government raises taxes by $100 billion. Assuming the marginal propensity to consume is 0.6, identify the changes to public saving, private saving, national saving, and investment. Let Y = Income, C = Consumption, I = Investment, G = Government Purchases, and T = Taxes. Private saving is defined as ____
Y - T - C(Y - T)
Place each scenario into the proper category, as most likely to exhibit either increasing or decreasing returns to scale. A small economy has many unemployed workers and much unused capital. However, unemployed workers have less work experience and education than those currently working. An increase in consumer demand causes all firms in the economy to hire 10% more workers and lease 10% more capital.
decreasing
The government raises taxes by $100 billion. Assuming the marginal propensity to consume is 0.6, identify the changes to public saving, private saving, national saving, and investment. Let Y = Income, C = Consumption, I = Investment, G = Government Purchases, and T = Taxes. If taxes are increased by $100 billion, then: Private saving will decrease by ______.
$40 billion
The government raises taxes by $100 billion. Assuming the marginal propensity to consume is 0.6, identify the changes to public saving, private saving, national saving, and investment. Let Y = Income, C = Consumption, I = Investment, G = Government Purchases, and T = Taxes. If taxes are increased by $100 billion, then: Investment will increase by _______.
$60 billion
The government raises taxes by $100 billion. Assuming the marginal propensity to consume is 0.6, identify the changes to public saving, private saving, national saving, and investment. Let Y = Income, C = Consumption, I = Investment, G = Government Purchases, and T = Taxes. If taxes are increased by $100 billion, then: National saving will increase by ______.
$60 billion
Suppose the government increases both taxes (T) and government purchases (G) by equal amounts. Assuming income (Y) is fixed by the factors of production, the change in national saving (ΔS) will be
(MPC − 1) × ΔT
A closed economy has income Y of 1200, consumption C of 800, government purchases G of 200, and taxes T of 150. Investment is determined by the equation I = 300 − 20r. a. Calculate national saving. National saving = b. Calculate public saving. Public saving = c. Calculate private saving. Private saving = d. Calculate equilibrium interest rate. Equilibrium interest rate = e. If the government increases its purchases to 240, what is the new equilibrium interest rate? New equilibrium interest rate =
a. 200 b. -50 c. 250 d. 5 e. 7
According to the neoclassical theory of distribution, a worker's real wage reflects her productivity. Let's use this insight to examine the incomes of two groups of workers: farmers and barbers. Let Wf and Wb be the nominal wages of farmers and barbers, Pf and Pb be the prices of food and haircuts, and MPLf and MPLb be the marginal productivity of farmers and barbers. a. Over the past century, the productivity of farmers (MPLf) has risen substantially due to technological progress. According to the neoclassical theory, farmers' real wage (Wf/Pf) should have... b. Over the past century, the productivity of barbers (MPLb) has remained constant. According to the neoclassical theory, barbers' real wage (Wb/Pb) should have... c. In arts a and b, real wages are measured as... d. Suppose workers can move freely between being farmers or being barbers (i.e., no additional costs are required to switch between occupations). This implies that the nominal wages of... e. Your answers in parts a through d imply that the relative price of haircuts, Pb, has _____ relative to the price of food, Pf.
a. increased b. remained constant c. units of output per hour worked. d. farmers and of barbers will be equal. e. risen
Consider a Cobb-Douglas production function with three inputs. K is capital (the number of machines), L is labor (the number of workers), and H is human capital (the number of college degrees among the workers). The production function is Y = K1/3L1/3H1/3. a. The expression for the marginal product of labor (MPL) can be found by taking the partial derivative of the Cobb-Douglas production function with respect to L: MPL = 13(K1/3L−2/3H1/3). From this equation, how does an increase in the amount of human capital affect the marginal product of labor? An increase in human capital will _____ the marginal product of labor. b. The expression for the marginal product of human capital (MPH) can be found by taking the partial derivative of the Cobb-Douglas production function with respect to H: MPH = 13(K1/3L1/3H−2/3) From this equation, how does an increase in the amount of human capital (H) affect the marginal product of human capital? An increase in human capital will ______ the marginal product of human capital. c. Total income paid to labor in the economy is the real wage times the quantity of labor. Under perfect competition, the real wage equals MPL, and the real earnings to human capital equal MPH. Total income in the economy, Y, is determined by the production function. What are the income shares paid to labor (L) and to human capital (H)? Labor's share of total income in the economy is _____. d. In the national incomes accounts, the share of national income going to workers in general would be _____. e. An unskilled worker earns the marginal product of labor (MPL), whereas a skilled worker earns the marginal product of labor plus the marginal product of human capital (MPL + MPH). Consider the answers to questions a and b above. How would an increase in the amount of human capital in the economy (more college degrees) impact the share of income going to both skilled and unskilled workers? Decreasing returns means that increasing the number of college degrees in the economy will ________ the wage premium enjoyed by workers holding a college degree. Increasing the number of college degrees will ________ the earnings of unskilled workers in the economy.
a. raise b. lower c. 1/3 d. 2/3 e. decrease, increase
Suppose there are two types of investment in the economy: business investment and residential investment. The interest rate adjusts to equilibrate national saving and total investment, which is the sum of business investment and residential investment. Now suppose that the government institutes an investment tax credit only for business investment. Consider the market for loanable funds. On the graph below, (1) indicate the change in total investment demand, and (2) indicate the new market real interest rate. a. Compare the old and the new market equilibria. The total quantity of investment _______. b. The quantity of residential investment _______. c. The quantity of business investment ___________.
a. remains unchanged b. decreases c. increases
Total labor income equals the real wage times the amount of labor hired: 𝑊𝑃×𝐿=𝑊𝐿𝑃. Labor's share of income is thus𝑊𝐿𝑃divided by output Y: (𝑊𝐿𝑃)𝑌=𝑊𝐿𝑃𝑌 Suppose that labor's share of total income is approximately constant over time, as Figure 3-5 in the text shows has been true of the U.S. If labor's share of income is approximately constant, the real wage...
closely tracks labor productivity.
Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the events described below. Assume that production follows a Cobb-Douglas production function. A wave of immigration increases the labor force. The real wage will ________, and the real rental price of capital will _______
decrease increase
Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the events described below. Assume that production follows a Cobb-Douglas production function. An earthquake destroy some of the capital stock.The the real wage will _____, and the real rental price of capital will _____
decrease increase
Place each scenario into the proper category, as most likely to exhibit either increasing or decreasing returns to scale. A small island nation's economy consists solely of commercial fishing firms. These firms currently employ modest boats manned by small crews to efficiently harvest all of the 10-mile offshore perimeter of the nation's sovereign ocean waters. Each day, these boats go out to sea and return to the island to deliver their catch to buyers. A new treaty expands this legal fishing area to a 20-mile offshore perimeter. The firms respond by employing 10% more boats and 10% more crews to exploit this new opportunity.
decreasing
Show on the graph how each of the following events changes the equilibrium interest rate by shifting the relevant curve(s). Congress repeals an investment tax credit and uses the revenue to reduce other taxes.
demand shifts left
Show on the graph how each of the following events changes the equilibrium interest rate by shifting the relevant curve(s). An engineering advance induces many firms to upgrade their computer systems.
demand shifts right
Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the events described below. Assume that production follows a Cobb-Douglas production function. A tchnological advance improves the production function. The real wage will ______, and the real rental price of capital will _____
increase increase
Suppose that an economy's production function is Cobb-Douglas with parameter 𝛼=0.3. Suppose that a technological advance raises the value of the parameter A by 10 percent. (i) Total output will ___ (ii) The rental price of capital will __ (iii) The real wage will ___
increase by 10%. increase by 10%. increase by 10%.
Suppose that an economy's production function is Cobb-Douglas with parameter 𝛼=0.3. Suppose that a gift of capital from abroad raises the capital stock by 10 percent. (i) Total output will ___ (ii) The rental price of capital will ___ (iii) The real wage will ___
increase by 2.9%. decrease by 6.5%. increase by 2.9%.
Suppose that an economy's production function is Cobb-Douglas with parameter 𝛼=0.3. Suppose immigration increases the labor force by 10 percent. (i) Total output will ___. (ii) The rental price of capital will __ (iii) The real wage will __
increase by 6.9% increase by 6.9%. decrease by 2.8%.
The government raises taxes by $100 billion. Assuming the marginal propensity to consume is 0.6, identify the changes to public saving, private saving, national saving, and investment. Let Y = Income, C = Consumption, I = Investment, G = Government Purchases, and T = Taxes. If taxes are increased by $100 billion, then: Public saving ______ by $100 billion.
increases
Place each scenario into the proper category, as most likely to exhibit either increasing or decreasing returns to scale. A developing national economy currently employs a small percentage of its available labor force and capital. Increased global demand for the nation's output requires its firms to employ 10% more labor and 10% more capital. This change allows firms to try new and novel combinations of labor and capital in their production processes.
increasing
Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the events described below. Assume that production follows a Cobb-Douglas production function. High inflation doubles the prices of all factors and outputs in the economy. The real wage will ________, and the real rental price of capital will _______
remain unchanged remain unchanged
Suppose there are two types of investment in the economy: business investment and residential investment. The interest rate adjusts to equilibrate national saving and total investment, which is the sum of business investment and residential investment. Now suppose that the government institutes an investment tax credit only for business investment. How does this policy affect the demand curve for residential investment? The demand curve for residential investment _______
reminds unchanged
Suppose that an increase in consumer confidence raises consumers' expectations about their future income and thus increases the amount they want to consume today. This might be interpreted as an upward shift in the consumption function. a. In the graph below, (1) adjust the appropriate curve, and (2) move the equilibrium point to reflect the impact of an increase in consumption today due to expectations of higher future income. b. As a result of the change in consumer expectations, the interest rate _____, and investment _____.
rises falls
Suppose there are two types of investment in the economy: business investment and residential investment. The interest rate adjusts to equilibrate national saving and total investment, which is the sum of business investment and residential investment. Now suppose that the government institutes an investment tax credit only for business investment. How does this policy affect the demand curve for business investment? The demand curve for business investment _______
shifts to the right
The larger is the MPC (the closer it is to 1), the _______ will be the decline in investment, and the ______ will be the increase in the interest rate.
smaller smaller
Show on the graph how each of the following events changes the equilibrium interest rate by shifting the relevant curve(s). The president signs a tax cut into law.
supply shifts left
Show on the graph how each of the following events changes the equilibrium interest rate by shifting the relevant curve(s). A flu pandemic induces consumers to stay at home rather than go shopping.
supply shifts right
