EC 309 Exam 1

Assume that a firm buys all the parts that it puts into an automobile for $10,000, pays its workers $10,000 to fabricate the automobile, and sells the automobile for $22,000. In this case, the value added by the automobile company is:

$12,000

Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 5 in 2009, then the GDP deflator in 2009, using a base year of 2002, was approximately:

1.9

The national income identity is expressed as:

Y = C + I + G + NX

The marginal product of labor is:

additional output produced when one additional unit of labor is added

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

0.85 units

What does the annual percentage change in the GDP deflator tell us?

The inflation rate

A manager of a perfectly competitive firm observes that the marginal product of labor is 5 units per hour, the marginal product of capital is 40 units per machine, the wage is $20 per hour, the rental price of capital is $120 per machine, and the price of output is $5 per unit. To maximize profit, the manager should hire ________ labor and rent _______ capital.

More, more

_________ GDP measures the value of the economy's output at current prices.

Nominal

Unlike the real world, the classical model with fixed output assumes that:

capital and labor are fully utilized.

In the national income accounts, the purchases of durables, nondurables, and services by households are classified as:

consumption.

The real wage will increase if:

the productivity of labor increases.

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 $60 billion

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

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will:

increase

In the national income accounts, goods bought for future use are classified as which type of expenditure?

investment

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. Holding other things constant, when the government lowers taxes on business investment, thus increasing investment demand, the quantity of investment:

is unchanged and the interest rate rises

The prices of capital goods are:

not included in the CPI but are included in the GDP deflator.

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

The real wage is the return to labor measured in:

units of output.

The inflation rate measures how fast:

prices are rising