Chapter 3

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. (1 − MPC) × ΔT.

(MPC − 1) × ΔT.

Suppose that an economy's production function is Cobb-Douglas with parameter 𝛼=0.3. a. Capital and labor receive shares of income of ___ and ___, respectively. b. Suppose immigration increases the labor force by 10 percent. (i) Total output will increase by ___ (ii) The rental price of capital will increase by --- (iii) The real wage will decrease by ___ c. Suppose that a gift of capital from abroad raises the capital stock by 10 percent. (i) Total output will increase by ___ (ii) The rental price of capital will decrease by ___ (iii) The real wage will increase by ___ d. Suppose that a technological advance raises the value of the parameter A by 10 percent. (i) Total output will increase by 10% . (ii) The rental price of capital will increase by 10% . (iii) The real wage will increase by 10% .

a: 0.3; 0.7 bi: 6.9% bii: 6.9% biii: 2.8% ci: 2.9% cii: 6.5% ciii: 2.9% di: 10% dii: 10% dii: 10%

An economy has the following Cobb-Douglas production function: Y=100K13L23. The economy has 125 units of capital and 64 units of labor. a. Calculate this economy's output. Output is units. b. Calculate the marginal product of capital MPK. (keep one decimal) MPK = c. Calculate the marginal product of labor (MPL). (keep one decimal) MPL=

a: 8000 b: 21.3 c: 83.3

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. A wave of immigration increases the labor force. The real wage will [ Select ] ["increase", "decrease", "remain unchanged"] , and the real rental price of capital will [ Select ] ["increase", "decrease", "remain unchanged"] . b. An earthquake destroy some of the capital stock. The the real wage will [ Select ] ["increase", "decrease", "remain unchanged"] , and the real rental price of capital will [ Select ] ["increase", "decrease", "remain unchanged"] . c. A technological advance improves the production function. The real wage will [ Select ] ["increase", "decrease", "remain unchanged"] , and the real rental price of capital will [ Select ] ["increase", "decrease", "remain unchanged"] . d. High inflation doubles the prices of all factors and outputs in the economy. The real wage will [ Select ] ["increase", "decrease", "remain unchanged"] , and the real rental price of capital will [ Select ] ["increase", "decrease", "remain unchanged"] .

a: decrease: increase b: decrease; increase c: increase; increase d: remains unchanged; remains unchanged

The larger is the MPC (the closer it is to 1), the (larger/smaller) will be the decline in investment, and the (smaller/larger) will be the increase in the interest rate.

a: smaller b: smaller

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 . 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 ei:7

Total labor income equals the real wage times the amount of labor hired: WP×L=WLP. Labor's share of income is thus WLP divided 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 (the one I have shown in the lecture slide). If labor's share of income is approximately constant, the real wage systematically diverges from labor productivity. is inversely related to labor productivity. closely tracks labor productivity. is unrelated to labor productivity.

closely tracks labor productivity