Econ 303 Final
Acme Steel Co. produces 1000 tons of steel. Steel sells for $30 per ton. Acme pays wages of $10,000. Acme buys $15,000 worth of coal, which is needed to produce the steel. Acme pays $2,000 in taxes. Acme's contribution to GDP is
$15,000.
We have the following information about a shoe manufacturer: wages $100,000, sales $500,000, taxes $50,000, loan interest $10,000, leather purchases $170,000, and rubber purchases $130,000. What is the contribution of this manufacturer to GDP using the income approach?
$200,000.
Which of the following taxes are labor income taxes or have a component that is labor income tax? (I) payroll tax. (II) individual income tax. (III) corporate income tax. (IV) sales tax. (V) property tax. (VI) excise and customs.
(I) and (II).
Assume that capital share is 30%. GDP in country A grew at the rate of 3% per year. Capital grew at the rate of 5% and labor 1% per year. What is the growth rate of TFP?
0.8%
Suppose that the real interest rate is r. To get one unit of real income next period how much does a household has to save today?
1/(1+r)
The GDP per capita in country M grows at a constant rate of 7%. The living standard in country M will double in approximately how many years?
10 years.
In Dakistan 3M people work, 0.5M are unemployed and get UI benefits, 0.1M are unemployed without UI benefits, and 3M have no intention to work. The unemployment rate is (to the nearest %)
17%
If the real wage is equal to 8 widgets and only an integer number of workers can be hired the Gizmo company should hire
2 workers.
Which of the following is a correct statement about income effect?
A consumer who experiences an income effect moves to a different indifference curve.
An increase in lump-sum taxes has which of the following impacts on the budget constraint?
A parallel move down.
Dick became a partner of a consulting firm. He bought the lifetime membership of a country club. Dick's behavior can be explained by which of the following?
A permanent increase of income.
Even though capital per worker in India was less than 1/20 of that in the US at the end of the World War II, India's growth rate stayed low. This could due to which of the following fact(s)?
All of the choices.
Which of the following statement is correct about a competitive equilibrium in a one-period macro model of an economy?
All statements are correct.
Which of the following statements is correct regarding to capital income tax?
All statements are correct.
Which of the following policies can increase job opportunity and wage at the same time?
Attract foreign direct investment.
USSR was investing larger percentage of their GDP than the US after the World War II. As a result (a) USSR could not keep its higher growth rate for ever; (b) people in the USSR don't necessarily enjoy higher consumption even in the long run. Which of the above two statement(s) is/are correct?
Both
To compute the Chain-weighted real GDP nominal GDP is adjusted for which type(s) of price changes?
Both changes of general price level and relative prices.
There are policy proposals to move the US tax system from income based to consumption based. What is the theoretical support to such reform initiatives?
Both consumption and income tax distort households' labor supply decision, but income tax also distorts households' saving decision while consumption tax does not.
A decrease in the real interest rate will lead to a substitution effect described by which of the following statements?
Consumption in the future is relatively more expensive; households consume more now and less in the future.
Which of the following statements is correct?
Consumption tax has substitution effect and income effect in consumption-leisure choice but only has income effect in intertemporal choice.
The Solow growth model tells us that the standard living in country A can be higher than in country B for all the following reasons, EXCEPT which one?
Country A has a higher depreciation rate than country B.
We assume that the representative consumer's preferences exhibits all of the following properties, EXCEPT which one
Current and future consumption must be the same.
Darrel was laid off for a job recently, which paid him a very decent salary. He started to work part time in a local grocery store, which pays him slightly above the minimum wage. Based on Darrel's choice we can deduce which of the following?
Darrel works less because he experiences both an income effect and a substitution effect and the substitution effect is stronger.
Look at the production schedule below:
Diminishing marginal product of labor
Edward is 60 years old. He had accumulated a sizable retirement fund invested in the stock market. Michael is 25 year old. He just started to accumulate his retirement fund. When returns on the stock market increases which of the following is a correct statement?
Edward is affected mainly through income effect while Michael is affected mainly through substitution effect
Counter-cyclical macro policy includes all the following EXCEPT which one?
Force government to balance budget during economic recessions.
Suppose that an economy lasts for two periods. The government spending of the two periods are 0.5 and 0.11, respectively. Suppose that the real interest rate is 10% and the amount of tax collected in the first period is 0.3. Which of the following is correct?
Government borrowing in the first period is 0.2.
According to the Real Business Cycle (RBC) theory which of the following is a correct description of labor market behavior after a good productivity shock hits the economy?
Higher productivity shifts the labor demand curve to the right. The labor supply of households is adjustable. The new equilibrium has a higher wage and more employment.
According to the Real Business Cycle theory which of the following correctly describes households consumption-saving response when they are hit by an unfavorable productivity shock?
Households experience a temporary income decrease today. They consume less today and decrease their saving.
Suppose that both country A and B collect flat rate labor income tax. The tax rate in country A is 5% and that in country B is 25%. Other than that everything else are the same. Considering the substitution effect only which of the following is correct?
Households in country A supply more labor and consume more than households in country B.
Joe has a bigger subjective discount factor than Arthur. For example, Joe's subjective discount factor is 0.95 while Arthur's is 0.9. Which of the following is NOT correct?
If Joe and Arthur have the same income and interest rate Joe will consume more now than Arthur.
Which of the following is NOT a correct statement about Laffer curve?
If there is a Laffer curve it is never possible to raise government revenue while cutting tax rate.
According to the Taylor rule what does the US monetary policy do?
Increase money supply during recessions and reduce money supply when inflation rate goes up.
Which of the following reforms helps to solve the solvency problem of the US social security program for all parties involved?
Increase payroll tax and normal retirement age.
Which of the following is a correct way of calculating inflation rate?
Inflation rate of 2005 = (GDP deflator 2005/GDP deflator 2004 -1)*100%.
Which of the following is the tax base of a capital income tax?
Interest received by Mr. Sam on his saving account.
Jack just won a million dollar lottery
Jack will work less due to an income effect.
Which of the following is a correct statement on lump-sum vs. flat rate tax?
Lump-sum tax only has an income effect while flat rate tax has both an income and a substitution effect.
Two factors, capital and labor, are use in production. Based on our assumptions on production functions which of the following statements is true?
Marginal product of labor decreases if more labor is used in production while keeping capital at the same level.
Fiscal policy encompasses all of the following EXCEPT which one?
Monetary injection by the government
If the central bank increases the growth rate of money supply what will happen to an economy in the long run?
Nothing happens to real GDP growth; both inflation rate and nominal interest rate increases.
A developing country sends smart kids to the US to be educated and purchases blueprints to make micro chips. Which of the following statements is true?
Only the first one refers to the accumulation of human capital.
According to one-period model of macroeconomics which of the following statements is correct about an economy engaging in a war financed by debt?
Output is increased but consumption is cut back so that the spending multiplier is positive but less than one.
All of the following are consumption taxes EXCEPT which one?
Payroll tax
Contrary to the prediction of Ricardian equivalence studies on Bush 2008 tax rebate showed that a tax cut without cutting spending led to some increase of private consumption. In this case
Ricardian equivalence fails because some households are credit constrained; they would like to borrow to consume today but were discouraged by high interest rate they have to pay.
Which of the following is a tax free saving program?
Roth IRA
A tax increase without a spending increase will cause households to do which of the following?
Save less and consume the same amount.
Mary won a $100,000 lottery. According to the Permanent Income Hypothesis (PIH), Mary will do which of the following?
Spend a small amount of the money right away and save the rest for future consumption.
The Clinton administration lowered the tax rate on income from capital gains and the later Bush administration lowered the tax rate on dividend. These tax reforms are justified by which of the following arguments?
Tax on dividend and capital gains is a capital income tax and a reduction of its tax rate encourages saving and accumulation of capital
When interest rate decreases, which of the following statements on present value (PV) of income is correct?
The PVs of income for both households are higher, but the increase of household B's PV is bigger.
Which of the following statements is a correct description of the social security program in the US?
The US social security is a pay-as-you-go program where payroll tax from current workers is used to pay for benefits of current retirees.
Despite that the labor productivity is lower a firm decides to hire more worker. Which of the following statements is correct?
The demand of labor shifts to the left; the quantity of labor demanded increases due to a fall of the real wage.
Which aspect of the current US social security program indicates that it is an insurance against longevity risks?
The elderly receives social security benefits as long as they live.
Which of the following shifts the labor demand curve?
The firm increases the amount of capital in production.
When a firm produces output,
The firm's output contributes to GDP only to the extent that there is value-added
Which of the following is a correct statement about the first welfare theorem?
The first welfare theorem holds when government collects a lump-sum tax.
As a poor economy inches towards the steady state in the Solow growth model what happens?
The growth rate of output decreases.
Which of the following best describes the logic of Ricardian equivalence?
The income effect of different tax plans is determined by the present value of government spending
The presence of a distortionary labor income tax leads to which of the following?
The marginal product of labor is bigger than the marginal rate of substitution between leisure and consumption.
Suppose that country Sophisticated only produces coffee and computers. We have the following data for year 2014 and 2015. Use 2014 price to calculate real GDP.
The nominal GDP increased less than the real GDP.
Why does the US social security program run into solvency problem?
The promised return of the forced saving is higher than budget balance return.
Currently the US central bank uses which of the following to communicate with the public about their intention for monetary policies?
The targeted federal funds rate
Which of the following is NOT a property of a competitive equilibrium?
The total factor productivity is increasing.
Let r denote the real interest rate. The horizontal axis is consumption in the future and vertical axis is consumption now. Which of the following statements about intertemporal budget line is correct?
The vertical intercept is the present value of income and the slope (absolute value) is 1/(1+r).
According to the endogenous growth model with human capital what can we say that is definitely true about countries with more efficient schools?
They grow faster.
Suppose that a firm uses only labor in production. If this firm maximizes profits which of the following statements is true?
This firm will hire labor to the point where the marginal product of labor is equal to the real wage.
Which of the following is NOT a correct description of a pay-as-you-go social security program?
To balance the budget in pay-as-you-go, the return on forced saving must equal the real interest rate.
Which of the following is correct?
Total tax over total income gives the average tax rate; additional tax over additional income gives the marginal tax rate.
Which of the following does not shift the labor demand curve?
Wage decreases.
What assumption do we impose on the aggregate production function?
When we increase one input while keeping all the other input fixed the marginal contribution of that input decreases.
An increase in real dividend income represents
a pure income effect.
Data shows that inflation is the result of
a rapid money growth over real GDP growth
A temporary increase in income today leads to
a small increase in current consumption; the marginal propensity to consume is small.
If the representative firm stays on the same labor demand then
all of the choices are correct.
The base year of real GDP calculation is 1996, which means that
all of the choices are correct.
Some people, after receiving a significant amount of inheritance, dropped out of the labor force. This can be explained by
an income effect only.
When the real wage rate increases the substitution effect in the household's choices leads to
an increase in consumption and a decrease in leisure.
An increase in second-period income results in
an increase in first-period consumption, an increase in second-period consumption, and a decrease in saving.
If government spending is held constant and Ricardian equivalence holds
an increase in government saving is always matched by an equal reduction in private saving.
We say a bundle is the optimal choice for a consumer if
any bundle that is better costs more than what he can afford.
A progressive income tax means that
average tax rate rises with income.
The Federal Reserve conducts counter-cyclical monetary policy
because of Phillips curve.
If the price of college education falls then
both CPI and GDP deflator are affected by this price change.
The labor force participation rate is higher for workers with higher education. This can be explained by
both an income effect and a substitution effect and substitution effect dominates.
On a competitive labor market
both individual worker and individual firm have no influence on the real wage.
The property of diminishing marginal rate of substitution is the same property that indifference curves are
bowed in toward the origin.
Capital income tax is considered as a bad tax because
capital income tax makes future consumption relatively more expensive hence reduces households' saving.
Corporate income tax is a
capital income tax.
Money neutrality states that
changes in money do not affect real aggregates.
Double all input output is also doubled. This property of production function is referred as
constant returns to scale
We assume that the representative consumer's preferences exhibit the properties that
consumption and leisure are both normal goods and that the consumer likes diversity in his or her consumption bundles
The Golden Rule of capital accumulation maximizes the steady-state level of
consumption per capita.
Suppose that the BMW plant in Spartanburg, SC produces $10 million worth of vehicles in a given year. Of this total amount $1 million in profits si returned to the owners of the company in Germany. The $1 million in profits
contributes to U.S. GDP, but not U.S. GNP.
Additions to inventory are
counted as a component of investment.
GDP per capita in country A is 1/10 of that in country B. Country A grows at 4.3% per year, while country B 1% per year. In 50 years roughly
country B will be only twice as rich as country A.
The marginal propensity to consume measures how much does current consumption change when
current income changes
At the steady state of the Solow model a fall of total factor productivity
decreases both capital and output per capita.
At the steady state of the Solow model an increase in population growth rate
decreases both capital and output per capita.
A decrease in the real wage rate
decreases consumption and has an ambiguous effect on labor supply.
In the Solow growth model output per capita eventually stops growing because of
diminishing marginal product of capital.
A lump-sum tax is a tax that
does not depend on the actions of the economic agent being taxed.
Joe, Patrick, and Adam are friends. They have the same preference over consumption and leisure. Joe has two jobs. He auditions for sitcoms during daytime and works at CVS at night time. Patrick works from 9 to 5 as a curator at a local museum. Adam is a partner of a law firm and works over time almost every week. Clearly both Joe and Adam work more than Patrick. This is because
for Joe income effect dominates while for Adam substitution effect dominates
Ricardian equivalence may fail if
government debt incurred today may not be paid off until after some current households are deceased.
For a lender a decrease in the real interest rate
has an uncertain effect on current consumption and decreases future consumption.
From an individual's point of view
he or she prefers a social security program that gives him or her a higher personal return on the forced saving.
Mr. Green uses tax free saving plan instead of deferred tax saving plan because
he predicts that his marginal income tax rate when he retires would be higher than his marginal income tax rate now.
If a firm is at a point where the marginal product of labor is less than real wage it can be better off to
hire less labor.
In response to an increase in government spending financed by a higher tax rate on labor income
households consume less and work less if substitution effect dominates.
In response to an increase in government spending financed by debt
households consume less and work more due to negative income effect.
Which of the following is a correct expression for Fisher equation, where i is the nominal interest rate, r the real interest rate, and π the inflation rate?
i = r + π
In the Malthusian model an improvement in the technology of growing food is likely to
increase the size of the population and have no effect on the level of consumption per capita at the steady state.
When consumption and leisure are both normal goods after an increase of non-wage income a rational consumer
increases consumption and increases leisure.
An increase in total factor productivity
increases consumption, increases output, and increases the real wage.
The experience of the US economy during World Wars confirms the prediction that a dramatic increase of government spending
increases output but decreases consumption
The sum of the employed and the unemployed divided by the adult population is the
labor force participation rate.
When capital income increases and everything else stays the same on the labor market
labor supply decreases and the real wage increases.
A permanent increase of one-unit of government expenditures financed by more tax should, according to our model, increase GDP by
less than zero unit.
Before the Industrial Revolution standards of living differed
little over time and across countries.
If an epidemic hits a Malthusian economy the long-term consequence is
no change in the standard of living.
Supply-side economists argue that
one can sometimes increase tax revenue by decreasing tax rate.
A consumer is a lender if
optimum current consumption is less than current disposable income.
With a Cobb-Douglas production function number of workers are fixed. When capital doubles
output is less than doubled.
When production function is linear in labor the demand for labor is
perfect elastic.
In the Malthusian model the population growth rate is
positively related to consumption per worker.
We say that an economy experiences inflation if
prices of all goods have increased.
Real investment tends to be
procyclical and more volatile than real GDP.
If the correlation between GDP and y is 0.55, we say y is
procyclical.
We will get a downward sloping labor demand curve as long as
production function displays diminishing marginal product of labor.
If government runs fiscal deficit in a closed economy
public saving is negative and national saving is less than private saving.
A business cycle peak is a
relatively large positive deviation from trend in real GDP.
An increase in the real wage rate
represents a combination of income and substitution effects.
The value-added is
sales minus costs of intermediate goods.
When the real wage increases and everything else stays the same a firm
stays on the same labor demand curve and wants to hire less labor.
An increase in the real interest rate is an example of a
substitution effect and an income effect whose sign depends on whether the consumer is initially a borrower or a lender.
The Laffer curve is a curve showing
tax revenue as a function of tax rate.
If a household borrows at an interest rate greater than the interest rate at which he or she can lend
the budget constraint has a kink at the income point
Proportional income taxation is distortionary because
the competitive equilibrium is not Pareto optimal.
Suppose that two countries share identical level of total factor productivity, identical population growth rate, and identical investment rate. According to the Solow growth model
the country with the smaller initial level of output per worker will grow more rapidly than the country with the larger initial level of output per worker.
When the nominal interest rate is positive but less than the inflation rate
the dollar amount of saving increases next period, but the purchase power of saving decreases.
The assumption that current period consumption is positively related to the real interest rate is justified as long as
the income effect of a lender dominates the substitution effect.
In response to an increase in total factor productivity
the labor demand shifts to the right but the labor supply shifts to the left.
The tax base is
the object being taxed.
We say a tax plan is feasible as long as
the present value of tax collections is greater than or equal to the present value of government spending.
We can use a per-worker production function in the Malthusian model because
the production function is constant returns to scale.
On a loanable funds market when real interest rate increases
the quantity of funds supplied by households increases.
The marginal rate of substitution measures
the rate at which a consumer is willing to exchange one good for another.
On the loanable funds market things traded are
the right to use a certain amount of money; price is usage fee, aka, the real interest rate.
The PPF determines
the set of feasible outcomes.
An epidemic hits a Malthusian economy. Right after the end of epidemic
the standard of living increases.
If the quantity of labor supplied increases when the real wage increases then
the substitution effect is larger than the income effect.
In a crude oil producing country a recent surge of international oil price increases the income of average households. On the loanable funds market
the supply curve shifts to the right and the real interest rate decreases.
Consumption smoothing refers to
the tendency of consumers to seek a consumption path over time that is smoother than income.
The real wage denotes
the units of consumption goods that can be exchanged for one unit of labor.
Both Tim and Rob work for the same insurance company for the same pay. This year Tim landed a big contract and got a hefty bonus. Rob took a two-month unpaid leave to take care of his sick mother. Which of the following is a correct description of their consumption and saving behavior?
tim will increase his current consumption and saving.
An increase in total factor productivity shifts the PPF
upward and also changes its slope.
The expenditure components of GDP include all of the following except
wage
War spending differs from education spending in that
war spending is temporary and can be financed by debt.
Earned income tax credit (EITC) is better than means-tested welfare program as a way to help poor families because
welfare reduces labor supply due to a positive income effect while EITC increases labor supply due to a substitution effect.
A consumer is said to be indifferent between two consumption bundles
when the two bundles provide the equal amount of utility.
A decrease of total factor productivity
will decrease both marginal product of capital and labor.
When the real wage decreases and everything else stays the same a firm
will hire more labor and ends up with higher profits.