Macroeconomic Chapter 3: Where It Comes From and Where It Goes

Which of these is an investment good? - a computer bought by a firm - a newly issued Treasury bond - a new car purchased by a household - an old house bought by a family

- a computer bought by a firm

In the simplest model of consumer behavior, the most important determinant of consumption spending by a household is the: - interest rate. - household's stock market wealth. - household's disposable income. - household's housing wealth.

- household's disposable income.

In the classical model with supply fixed: - factor prices equal the gross domestic product divided by the marginal products of the factors of production - the capital stock has the crucial role of equilibrating supply and demand - supply determines the total output produced in the economy - an increase in G changes total output.

- supply determines the total output produced in the economy

Disposable income is income after: - saving and payment of taxes. - the payment of all taxes. - interest payments are deducted. - saving

- the payment of all taxes.

The ratio of labor income to total income in the United States has been approximately constant at about 2/3 since 1960. All of these statements are true EXCEPT that: - capital receives about a third of income, and labor receives about two-thirds - the personal income distribution in the United States has not changed - this statement is consistent with the Cobb-Douglas production function - capital's share of total income has been approximately constant over this period.

- the personal income distribution in the United States has not changed

The marginal product of labor for the production function Y = K0.5 L0.5, when L = 10 and K = 10, is _____, rounded to one decimal place.

0.5

Suppose that an economy has the production function Y = K0.5L0.5, with K = 10,000, and L = 400. The consumption function is C = 0.6(Y − T), and G = 500, T = 0.25Y, and I = 1,000 − 40r. The equilibrium real interest rate is _____percent (rounded to the nearest whole number).

10

10 percent and increases the quantity of equipment by 10 percent, the number of burgers produced increases by 10 percent.

10 percent and increases the quantity of equipment by 10 percent, the number of burgers produced increases by 10 percent.

A borrower has agreed to pay 12 percent on a home equity loan, and the inflation rate during the current year is 5 percent. This borrower faces a nominal interest rate of _____ percent and a real interest rate of _____ percent.

12; 7

Total investment in the United States averages about _____ percent of gross domestic product (GDP).

15

Suppose that the investment function is I = 3,500 − 100r, where r is the real interest rate (in percent). If the nominal interest rate is 12 percent and the inflation rate is 4 percent, then total investment will be:

2,700

The marginal product of labor for the production function Y = 2K + 3L is:

3

Suppose that the investment function is I = 3,000 − 100r, where r is the real interest rate (in percent). If the real interest rate rises from 4 percent to 7 percent, then investment will fall by:

300

Suppose that the consumption function is given by C = 500 + 0.75 (Y − T). If taxes decrease by 200, then saving will change by:

50

A farmer produces 200 bushels of corn, using 120 bushels for personal consumption and 80 bushels as seed corn. In this case, saving is 80 bushels, and investment is _____ bushel(s).

80

You are looking at the interest rates on two bonds, bond A and bond B, and you notice that the interest rate on bond A is higher than that on bond B. Which inference is consistent with this observation?

Bond A carries a greater risk of default than bond B.

The government runs a budget surplus when:

G + Transfer Payments < Taxes.

The government budget is balanced when:

G + Transfers = Taxes.

When a competitive firm hires an additional worker:

W is constant, P is constant, and MPL changes.

The marginal product of labor measures the additional output produced by hiring an additional unit of labor, and _____ labor productivity is Y divided by L.

average

The demand for goods and services in a closed economy is the sum of:

consumption, investment, and government purchases.

When investment spending decreases in response to an increase in government purchases, this is called:

crowding out

When the government increases its purchases of goods and services and at the same time increases taxes, so that public saving is unchanged, then:

crowding out will occur because national saving will fall.

When government borrowing increases, national saving falls, and the real interest rises; this MOST likely will cause the quantity of investment goods demanded to:

decrease

C + I + G is the _____ for the economy's output, and F(K, L) is the _____ of the economy's output.

demand; supply

The marginal propensity to consume is the increase in consumption when: - government spending increases by one dollar. - investment increases by one dollar. - the consumer price index (CPI) changes by 1 percent. - disposable income increases by one dollar.

disposable income increases by one dollar.

Suppose that an economy has the production functionY = K0.5L0.5, with K = 10,000, and L = 400. The consumption function is C = 0.6(Y − T), G = 500, T = 0.25Y, and I = 1,000 − 40r. If government spending falls to 420, then the real interest rate will _____ percent, and investment will rise by 80.

fall by 2

Assume that factors of production and technology are fixed but that saving is positively related to the interest rate (i.e., consumers increase saving when the interest rate rises). If the government cuts taxes while holding government purchases constant, equilibrium investment will _____, and equilibrium income will _____.

fall, remain unchanged

The notation I = I(r) indicates that investment I is a _____ of r, the real interest rate.

funcation

In the classical model, in which saving does not depend on the interest rate, if the government decreases G, then C will not change, r will decrease, I will ____, and Y will not change.

increase

According to the classical model with fixed factors of production, an increase in spending on public infrastructure projects, such as new airports, roads, and railways, will increase government purchases and decrease:

investment

National saving represents the amount of output that has not been claimed by consumers and the government. In equilibrium, in a closed economy, national saving must equal:

investment

When C + I + G is less than Y = F(K, L), the demand component that will adjust is _____. This adjustment is triggered by a fall in the real interest rate.

investment

According to the classical model, if an economy is in equilibrium with C + I + G = Y, and consumers increase spending because of a stock market boom, then: - unemployment will fall. - government spending will decrease. - investment will drop because r will increase. - output will increase because of the increase in consumer spending.

investment will drop because r will increase.

When the quantity of the factors of production is fixed and technology does not change, then the supply of goods and services for the entire economy:

is fixed

All else equal, a reduction in taxes would increase consumption by the marginal propensity to consume _____the amount of the reduction in taxes.

multiplied by

S = Y − C − G is _____ saving, while Y − T − C is _____ saving.

national; private

The demand for factors of production is _____ to factor prices, while the supply of factors of production is not related to factor prices.

negatively related

Suppose that the government grants investment tax credits without changing the overall tax revenue T. In this case, the investment demand function will shift rightward, but in equilibrium, the quantity demanded of I will _____ because r will _____.

not change; increase

Households use their income to save, consume, and:

pay taxes

Data for the United States indicate that real wage growth is _____ the growth of labor productivity.

positively correlated with

All variables in the classical model are measured in _____ terms; this means they only represent quantities of goods and services.

real

Suppose that the government grants investment tax credits without changing the overall tax revenue T. In this case, the investment demand function will shift _____, but in equilibrium, the quantity demanded of Iwill _____ because r will increase.

rightward; not change

For the U.S. economy, the shares of income going to labor and capital are roughly constant over time. A production function that has this property is:

the Cobb-Douglas production function

For the production function Y = K0.6 L0.4, the larger is the capital stock, K, _______ the marginal productivity of labor.

the larger

The price of labor is the _____, and the price of capital is the _____.

wage; rent

With constant returns to scale and competitive, profit-maximizing firms, total output is divided between labor and capital according to their marginal products, and economic profits are:

zero