Econ 102 Chapter 3
If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, public saving is
-200
Assume that the production function is Cobb-Douglas with parameter α = 0.3. If factors are paid their marginal products, capital and labor, respectively, receive the shares of income
.3 and .7
Assume that equilibrium GDP (Y) is 5,000. Consumption (C). is given by the equation C = 500 + 0.6Y. No government exists. In this case, equilibrium investment is
1500
Assume that the consumption function is given by C = 150 + 0.85(Y - T), the tax function is given by T = t0 + t1Y, and Y is 5,000. If t1 decreases from 0.3 to 0.2, then consumption increases by
425
If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is
500
Suppose that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.5(Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. Government spending (G) is 1,000 and taxes (T) is also 1,000. When a technological innovation changes the investment function to I = 3,000 - 100r:
I is unchanged and r rises by 10 percentage points
(Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals desired investment, I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts taxes, holding other factors constant?
Point A
(Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals desired investment, I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government increases spending, holding other factors constant
Point A
In a closed economy, private saving equals
Y-T-C
the marginal product of capitol is
additional output produced when one additional unit of capital is added
the marginal product of labor is
additional output produced when one additional unit of labor is added
economic profit is zero if
all factors are paid their marginal products and there are constant returns to scale
In the United Kingdom between 1730 and 1920, during wartime, government spending tended to increase
and the interest rate also increased
government transfer payments
can be viewed as negative tax payments
The two most important factors of production are
capital and labor
If an increase of equal percentage in all factors of production results in an increase in output of the same percentage, than a production function has the property
constant returns to scale
In a closed economy, the components of GDP are
consumption, investment, and government purchases
the demand for output in a closed economy is the sum of
consumption, investment, and government spending
in examining the impact of fiscal policy, it is assumed that
consumption, investment, and the interest rate are endogenous variables
The circular flow model shows that households use income for
consumption, taxes, and savings
Estimates by Goldin and Katz indicate that the financial returns of a year of college _____ between 1980 and 2005.
increased
The demand for loanable funds is equivalent to
investment
Use the model developed in Chapter 3, but assume that consumption decreases, other things being equal, when the interest rate rises. If there is a technological advance that leads to an increase in investment demand
investment increase and the interest rate rises
In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. By doing so
investment rises and the interest rate falls
In a closed economy, Y - C - G equals
national saving
in equilibrium, total investment equals
national saving
Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides that it should
not build because the rate of return on the factory is only 12 percent
An economy's factors of production and its production function determine the economy's
output of goods and services
public saving is either
positive, negative, or zero
In a closed economy with fixed output, when government spending increases
public saving decreases
In the long run, what determines the level of total production function of goods and services in an economy?
quantity of capital, quantity of labor, and production technology
a competitive firms chooses the
quantity of labor and capital to employ
The supply and demand for loanable funds determines the
real interest rate
In a neoclassical 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
rise $40 billion
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, public saving:
rises by$100 billion
In fourteenth century Europe, the bubonic plague
substantially increased real wages in Europe
Disposable personal income is defined as income after the payment of all
taxes
In the classical model with fixed output, the supply and demand for goods and services are balanced by
the interest rate
In a Cobb Douglas production function the marginal product of capital will increase if
the quantity of labor increase
In the classical model, what adjusts to eliminate any unemployment of labor in the economy?
the real wage
In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will
decrease
according to the model developed in Chapter 3, when taxes are increased but government spending is unchanged, interest rates
decrease
Accounting profit is
economic profit plus return to capital
The public policy implication of Goldin and Katz's analysis of growing income inequality is that reversing this trend will require that more of society's resources be put into
education
In the circular flow model, households receive income from the ________ market and save through the _________ market
factor, financial
In the long run, the level of national income in an economy is determined by it's
factors of production and production function
In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving ______ and private saving ______
increase, does not change
If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings
increases by .15 units
Assume that the production function is Cobb-Douglas with parameter α = 0.3. In the neoclassical model, if the labor force increases by 10 percent then output
increases by about 7 percent
Crowding out occurs when an increase in government spending ______ the interest rate and investment ______.
increases, decrease
Skill based technological change _______ the demand for high skilled workers, while the slowdown in the pace of educational advancement reduces the supply of high skilled workers, resulting in relatively _______ wages for skilled workers
increases, higher
According to the model developed in Chapter 3, when government spending increases without a change in taxes
investment decreases
In the classical model with fixed income, if the interest rate is too high, then investment is too ______ and the demand for output ______ the supply
low, falls short of
When economists speak of "the" interest rate, they mean
no particular interest rate, since it assumed that various interest rates tend to move up and down
Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y - T). Taxes (T) are equal to 1,000. Government spending is 600. In this case, equilibrium investment is
1500
Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. No government exists. In this case, the equilibrium real interest rate is
5 percent
If Y=AK^.5L^.5 and A,K, and L are all 100, the marginal product of capital is
50
Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + 0.2Y, and Y = 50K0.5L0.5, where K = 100. If L increases from 100 to 144, then consumption increases by
560
According to Golden and Katz, the increasing income equality of recent decades is a result of
a steady pace of technological advance and a slowdown of educational advance
If saving exceeds investment demand, and consumption is not a function of the interest rate
the interest rate will fall
In the classical model with fixed income, if households want to save more than firms want to invest, then:
the interest rate will fall
the real wage will increase if
the productivity of labor increases
the real rental price of capital is the price per unit of capital measured in
units of output
the real wage is the return to labor measured in
units of output
Other things equal, an increase in the interest rate leads to
a decrease in quantity of investment goods demanded
according to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed
between labor and capital used in production, according to their productivities
If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wage(s) of
both barbers and farmers should have risen over time
An example of increasing returns to scale is when capital and labor inputs:
both increase 5 percent and output increases 10 percent
If a neutral technological advance improves the production function, the neoclassical theory of distribution predicts:
both real wage and real rental price of capital will rise
an increase in the supply of capital will
decrease the real rental price of capital
The investment function slopes ______ because there are ______ investment projects that are profitable as the interest rate decreases
downward, more
The government spending component of GDP includes all of the following except
federal spending on transfer payments
In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will
increase
When government spending increases and taxes are increased by an equal amount, interest rates
increase
In the classical model with fixed income, a reduction in the government budget deficit will lead to a
lower real interest rate
the supply of loanable funds is equivalent to
national savings
the real interest rate is the
nominal interest rate minus the rate of inflation
Total investment in the United States averages about ______ percent of GDP
15
According to the neoclassical theory of distribution, total output is divided between payments to capitol and payments to labor depending on their
marginal productivities
the marginal propensity to consume is
normally expected to be between zero and one
According to Euler's theorem, if competitive firms pay each other its marginal product and the production function has constant returns to scale, the sum of all factor payments will be equal to
total output
Unlike the real world, the classical model with fixed output assumes that
all factors of production are fully utilized
If bread is produced by using constant returns to scale production function, then if the
amount of equipment and workers are doubled, twice as much bread will be produced
Consumption depends positively on ______ and investment depends negatively on ______
disposable income, the real interest rate
the neoclassical theory of distribution explains the allocation of
income among factors of production
national savings refers to
income minus consumption minus government spending
In a Cobb-Douglas production function the marginal product of labor will increase if
the quantity of capital increases
If increased immigration raises the labor force, the neoclassical theory of distribution predicts:
the real wage will fall and the real rental price of capital will rise
According to the model developed in Chapter 3, when government spending increases and taxes increase by an equal amount
consumption and investment both decrease
If government purchases exceed taxes minus transfer payments, then the government budget is
in deficit
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:
falls by $40 billion
Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when there is a technological advance that leads to an increase in investment demand
investment is unchanged and the interest rate rises
If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts:
the real wage will fall and the real rental price of capital will rise
the property of diminishing marginal product means that, after a point, when additional quantities of
a factor are added when another factor remains fixed, the marginal product of the first factor is fixed
According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when:
average labor productivity is growing rapidly
According to the model developed in Chapter 3, when taxes decrease without a change in government spending
consumption increases and investment decreases
The reduction in investment brought about by the increase in the interest rate caused by increased government spending is called
crowding out
In the neoclassical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving ______ and private saving ______
decreases, increases
When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a ______ interest rate and ______ in the quantity of investment
higher, an increase
Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate.
positively, negatively
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, investment:
rises by $60 billion
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, national saving:
rises by $60 billion
The factor that makes national saving equal investment, in equilibrium, is
the interest rate
In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would
crowd out between zero and $10 billion of investment
A production function is a technological relationship between
factors of production and the quality of output produced
According to the model developed in Chapter 3, when government spending increases but taxes are not raised, interest rates
increase
The home that would have the highest mortgage payment on a 30-year fixed-rate mortgage would be a home with a mortgage of
$200000 at 12 percent
If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by
.85 units
Assume that a firm wants to build a factory that will cost $5 million. It believes that it can get a return of $600,000 in one year and then can sell the used factory for its original cost. The rate of return on this investment would be
12 percent
Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + t1Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.25, then consumption decreases by
175
If the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals
2800
If disposable income is 4,000, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, national saving is equal to:
300
If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K0.5L0.5, where K = 100 and L = 100, then C equals
3000
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
760
investment goods as measured in GDP are purchased by
business firms and households
Assume that the consumption function is given by C = 150 + 0.85(Y - T) and the tax function is given by T = t0 + t1Y. If t0 increases by 1 unit, then consumption
decreases by .85 units
All of the following actions increase government purchases of goods and services except the
federal governments sending a Social Security check to Betty Jones
the demand for the economy's output
is equal to consumption, investment, and government purchases
the nominal interest rate is the
rate of interest the investors pay to borrow money
a firms economic profit is
revenue minus costs
When factor supply is fixed and quantity of the factor is graphed on the horizontal axis while factor price is graphed on the vertical axis the factor
supply curve is vertical
the equation Y=(C-T)+I(r)+G may be solved for the equilibrium level of
the interest rate
According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity is growing rapidly
workers will experience high rates of real wage growth
In the circular flow diagram, firms receive revenue from the___________ market, which is used to purchase inputs in the ________ market
goods, factor
public saving is
government revenue minus government spending
In the classical model with fixed income, if the interest rate is too low, then investment is too ______ and the demand for output ______ the supply
high, exceeds
When there is a fixed supply of loanable funds, an increase in investment demand results in a(n)
higher interest rate
The production function feature called "constant returns to scale" means that if we
increase capital and labor by 10 percent each, we increase output by 10 percent
In the classical model with fixed income, an increase in the real interest rate could be the result of a(n)
increase in government spending
In the classical model with fixed income a decrease in the real interest rate could be the result of a(n)
increase in taxes
Since 1960, the US ratio of labor income to total income has
been about .7
An example of decreasing returns to scale is when capital and labor inputs:
both increase 10 percent and output increase 5 percent
The price received by each factor of production for its services is determined by
demand and supply factors
A consumption function shows the relationship between consumption and
disposable income
private saving is
disposable income minus consumption
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 _____
disposable income, the interest rate, exogenously
If output is described by the production function Y = AK^0.2L^0.8 then the production function has
constant returns to scale
the neoclassical theory of distribution
is a theory of how national income is divided among the factors of production
At any particular point in time, the output of the economy
is fixed because the supplies of capital and labor and the technology are fixed
With a Cobb Douglas production function, the share of output going to labor
is independent of the amount of labor
a competitive firm
is small relative to the market which it trades
A competitive, profit maximizing firms hires labor until
price of output multiplied by the marginal product of labor equals the wage
national saving is
private saving plus public saving
Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when the government lowers taxes on business investment, thus increasing desired investment, but does not change government spending or change any taxes that affect disposable income, then the quantity of investment
decrease and the interest rate rises
Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y - T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 - 100r, where r is the real interest rate in percent. In this case, the equilibrium real interest rate is
13 percent
(Exhibit: Saving, Investment, and the Interest Rate 2) The economy begins in equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals desired investment, I1. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy)?
Point A
(Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals desired investment, I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts spending, holding other factors constant?
Point B
When the demand for loanable funds exceeds the supply of loanable funds, households want to save ______ than firms want to invest and the interest rate ______
less, rises
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 income. This shift, in a neoclassical economy, will
lower investment and raise the interest rate
(Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals desired investment, I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government raises taxes, holding other factors constant
Point B
(Exhibit: Saving, Investment, and the Interest Rate 2) The economy begins in equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals desired investment, I1. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods?
Point B
If a production function describing an economy is Y = 100 K^.25L^.75 then the share of output going to labor
is 75 percent
If the consumption function is given by C = 150 + 0.85(Y - T) and T increases by 1 unit, then savings
decreases by .15 units
What determines the distribution of national income between labor and capital in a competitive, profit maximizing economy with constant returns to scale?
the marginal productivity of labor relative to the marginal productivity of capital
