Chapter 3 Intmd Microeconomics

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.

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.

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:

3,000.

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

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 the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed:

between the labor and capital used in production, according to their marginal productivities.

All of the following actions increase government purchases of goods and services except the:

federal government's sending a Social Security check to Betty Jones.

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

The neoclassical theory of distribution explains the allocation of:

income among factors of production.

If saving exceeds investment demand, and consumption is not a function of the interest rate:

the interest rate will fall.

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

In the long run, what determines the level of total production of goods and services in an economy?

the quantity of capital, quantity of labor, and production technology

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.

(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 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 output is described by the production function Y = AK 0.2L0.8, then the production function has:

constant returns to scale.

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings:

increases by 0.15 units.

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

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.