EC 309 ch 3

public saving

(T-G) - government revenue - government spending

private saving

(Y-T-C) - disposable income minus consumption

constant returns to scale

zY=F(zK,zL)

In equilibrium, total investment equals: a. national saving. b. private saving. c. household saving. d. public saving.

a

Other things equal, an increase in the interest rate leads to: a. a decrease in the quantity of investment goods demanded. b. sometimes an increase and sometimes a decrease in the quantity of investment goods demanded. c. an increase in the quantity of investment goods demanded. d. no change in the quantity of investment goods demanded

a

review)A competitive, profit-maximizing firm hires labor until the: a. price of output multiplied by the marginal product of labor equals the wage. b. wage equals the rental price of capital. c. real wage equals the real rental price of capital. d. marginal product of labor equals the wage.

a

A firm's economic profit is: a. revenue plus capital costs. b. revenue minus costs. c. the price of output minus the wage minus the rental price of capital. d. the price of output minus labor costs.

b

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts that: a. the real wage will rise and the real rental price of capital will fall. b. both the real wage and the real rental price of capital will rise. c. the real wage will fall and the real rental price of capital will rise. d. both the real wage and the real rental price of capital will fall.

c

If disposable income is 4,000, consumption is 3,500, government purchases is 1,000, and taxes minus transfers are 800, national saving is equal to: a. 1,000. b. 500. c. 300. d. 700.

c

The two MOST important factors of production are: a. goods and services. b. labor and energy. c. saving and investment. d. capital and labor.

d

factors of production

inputs used to produce goods and services - capital and labor

(review)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? a. point C b. point B c. point A d. point D

B

constant returns to scale

a property of a production function where a proportionate increase in all factors of production leads to an equal increase in output

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. In addition, assume that G = 0. In this case, the equilibrium real interest rate is: a. 10 percent. b. 5 percent. c. 20 percent. d. 2 percent.

b

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? a. point D b. point A c. point C d. point B

b

(REVIEW)In the classical model with fixed income, an increase in the real interest rate could be the result of a(n): a. decrease in government spending. b. decrease in desired investment. c. increase in government spending. d. increase in taxes.

c

(review)In the classical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving _____ and private saving _____. a. increases; decreases b. decreases; does not change c. increases; increases d. decreases; increases

c

If increased immigration raises the labor force, the neoclassical theory of distribution predicts that: a. both the real wage and the real rental price of capital will rise. b. the real wage will rise and the real rental price of capital will fall. c. the real wage will fall and the real rental price of capital will rise. d. both the real wage and the real rental price of capital will fall.

c

(review)In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will: a. increase. b. increase initially and then decrease. c. remain unchanged. d. decrease.

d

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. In addition, assume G = 0. In this case, equilibrium investment is: a. 3,000. b. 2,000. c. 2,500. d. 1,500.

d

If an increase of an equal percentage in all factors of production increases output of the same percentage, then a production function has the property called: a. constant marginal product of labor. b. increasing returns to scale. c. increasing marginal product of labor. d. constant returns to scale.

d

In the classical model, what adjusts to eliminate any unemployment of labor in the economy? a. the real rental price of capital b. the interest rate c. the average price level d. the real wage

d

The assumption that the factor's supply is fixed will imply that the factor's: a. demand curve slopes up to the right. b. supply curve is horizontal. c. supply curve slopes up to the right. d. supply curve is vertical.

d

The demand for the economy's output: a. may be computed provided that we know disposable income. b. is determined by government purchases and taxes. c. is equal to the supply, regardless of the interest rate. d. is equal to consumption, investment, and government purchases.

d

production function

how much output is produced from given amounts of capital and labor. - output is a function of the amounts of capital and labor - reflects the available technology for turning capital and labor into output.

A production function is a mathematical relationship between: a. factors of production and the quantity of output produced. b. factor prices and the marginal product of factors. c. factors of production and factor prices. d. factor prices and the quantity of output produced

a

If government purchases exceed taxes minus transfer payments, then the government budget is: a. in deficit. b. endogenous. c. balanced. d. in surplus.

a

In a closed economy, Y - C - G equals: a. private saving. b. financial saving. c. national saving. d. public saving.

a

national savings

Y-C-G=I - output that remains after the demands of consumers and the government has been satisfied - sum of private and public saving

production function equation

Y=F(K,L)

In the classical model with fixed output, the supply and demand for goods and services are balanced by: a. the interest rate. b. taxes. c. government spending. d. fiscal policy

a

In the long run, the level of national income in an economy is determined by its: a. factors of production and production function. b. real and nominal interest rate. c. government budget surplus or deficit. d. rate of economic and accounting profit.In the long run, the level of national income in an economy is determined by its:

a

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? a. point B b. point A c. point C d. point D

a

The marginal product of capital is: a. additional output produced when one additional unit of capital is added. b. additional output produced when one additional unit of capital and one additional unit of labor are added. c. output divided by capital input. d. the value of additional output when one dollar's worth of additional capital is added.

a

When there is a fixed supply of loanable funds, an increase in investment demand results in a(n): a. higher real interest rate. b. increase in investment. c. decrease in investment. d. lower real interest rate.

a

review) When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a _____ real interest rate and _____ in the quantity of investment. a. higher; an increase b. higher; no change c. lower; an increase d. lower; no change

a

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)? a. point B b. point A c. point D d. point C

b

The investment function slopes _____ because there are _____ investment projects that are profitable as the interest rate decreases. a. downward; fewer b. downward; more c. upward; more d. upward; fewer

b

The nominal interest rate is the: a. rate of inflation minus the real rate of interest. b. rate of interest that investors pay to borrow money. c. same as the real interest rate. d. real rate of interest minus the rate of inflation.

b

The real interest rate is the: a. rate of interest actually paid by banks. b. nominal interest rate minus the rate of inflation. c. rate of inflation minus the nominal interest rate. d. rate of interest actually paid by consumers.

b

review) 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? a. point B b. point A c. point C d. point D

b

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. labor's share of output; capital's share of output; by the interest rate b. the interest rate; disposable income; by tax revenue c. disposable income; the interest rate; exogenously d. the real wage; the real rental price of capital; by factor prices

c

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will: a. remain unchanged. b. decrease. c. increase. d. fluctuate depending on whether consumption is greater or less than investment.

c

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. a. low; falls short of b. low; exceeds c. high; exceeds d. high; falls short of

c

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

Since 1960, the U.S. ratio of labor income to total income has: a. been about 2.5 to 1. b. increased steadily. c. remained relatively steady. d. decreased steadily.

c

The government purchases component of GDP includes all of these EXCEPT: a. state and local spending on goods. b. federal spending on services. c. federal spending on transfer payments. d. federal spending on goods.

c

The marginal product of labor is: a. additional output produced when one additional unit of labor and one additional unit of capital are added. b. value of additional output when one dollar's worth of additional labor is added. c. additional output produced when one additional unit of labor is added. d. output divided by labor input.

c