Econ 102 Chapter 3

The home that would have the highest mortgage payment on a 30-year fixed-rate mortgage would be a home with a mortgage of

$200000 at 12 percent

If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, public saving is

-200

Assume that the production function is Cobb-Douglas with parameter α = 0.3. If factors are paid their marginal products, capital and labor, respectively, receive the shares of income

.3 and .7

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

.85 units

Assume that equilibrium GDP (Y) is 5,000. Consumption (C). is given by the equation C = 500 + 0.6Y. No government exists. In this case, equilibrium investment is

1500

Assume that the consumption function is given by C = 150 + 0.85(Y - T), the tax function is given by T = t0 + t1Y, and Y is 5,000. If t1 decreases from 0.3 to 0.2, then consumption increases by

425

If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is

500

Assume that a firm wants to build a factory that will cost $5 million. It believes that it can get a return of $600,000 in one year and then can sell the used factory for its original cost. The rate of return on this investment would be

12 percent

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

(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 increases spending, holding other factors constant

Point A

In a closed economy, private saving equals

Y-T-C

the marginal product of capitol is

additional output produced when one additional unit of capital is added

the marginal product of labor is

additional output produced when one additional unit of labor is added

economic profit is zero if

all factors are paid their marginal products and there are constant returns to scale

In the United Kingdom between 1730 and 1920, during wartime, government spending tended to increase

and the interest rate also increased

government transfer payments

can be viewed as negative tax payments

The two most important factors of production are

capital and labor

If an increase of equal percentage in all factors of production results in an increase in output of the same percentage, than a production function has the property

constant returns to scale

In a closed economy, the components of GDP are

consumption, investment, and government purchases

the demand for output in a closed economy is the sum of

consumption, investment, and government spending

in examining the impact of fiscal policy, it is assumed that

consumption, investment, and the interest rate are endogenous variables

The circular flow model shows that households use income for

consumption, taxes, and savings

Estimates by Goldin and Katz indicate that the financial returns of a year of college _____ between 1980 and 2005.

increased

The demand for loanable funds is equivalent to

investment

Use the model developed in Chapter 3, but assume that consumption decreases, other things being equal, when the interest rate rises. If there is a technological advance that leads to an increase in investment demand

investment increase and the interest rate rises

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

In a closed economy, Y - C - G equals

national saving

in equilibrium, total investment equals

national saving

Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides that it should

not build because the rate of return on the factory is only 12 percent

An economy's factors of production and its production function determine the economy's

output of goods and services

public saving is either

positive, negative, or zero

In a closed economy with fixed output, when government spending increases

public saving decreases

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

quantity of capital, quantity of labor, and production technology

a competitive firms chooses the

quantity of labor and capital to employ

the nominal interest rate is the

rate of interest the investors pay to borrow money

The supply and demand for loanable funds determines the

real interest rate

a firms economic profit is

revenue minus costs

In a neoclassical economy, assume that the government lowers both government spending and taxes by $100 billion. If the marginal propensity to consume is 0.6, investment will

rise $40 billion

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, public saving:

rises by$100 billion

In fourteenth century Europe, the bubonic plague

substantially increased real wages in Europe

Disposable personal income is defined as income after the payment of all

taxes

In the classical model with fixed output, the supply and demand for goods and services are balanced by

the interest rate

In a Cobb Douglas production function the marginal product of capital will increase if

the quantity of labor increase

In the classical model, what adjusts to eliminate any unemployment of labor in the economy?

the real wage

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

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

decrease

according to the model developed in Chapter 3, when taxes are increased but government spending is unchanged, interest rates

decrease

Accounting profit is

economic profit plus return to capital

The public policy implication of Goldin and Katz's analysis of growing income inequality is that reversing this trend will require that more of society's resources be put into

education

In the circular flow model, households receive income from the ________ market and save through the _________ market

factor, financial

In the long run, the level of national income in an economy is determined by it's

factors of production and production function

In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving ______ and private saving ______

increase, does not change

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

increases by .15 units

Assume that the production function is Cobb-Douglas with parameter α = 0.3. In the neoclassical model, if the labor force increases by 10 percent then output

increases by about 7 percent

Crowding out occurs when an increase in government spending ______ the interest rate and investment ______.

increases, decrease

Skill based technological change _______ the demand for high skilled workers, while the slowdown in the pace of educational advancement reduces the supply of high skilled workers, resulting in relatively _______ wages for skilled workers

increases, higher

According to the model developed in Chapter 3, when government spending increases without a change in taxes

investment decreases

In the classical model with fixed income, if the interest rate is too high, then investment is too ______ and the demand for output ______ the supply

low, falls short of

When economists speak of "the" interest rate, they mean

no particular interest rate, since it assumed that various interest rates tend to move up and down

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 1,000. Government spending is 600. In this case, equilibrium investment is

1500

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + t1Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.25, then consumption decreases by

175

If the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals

2800

If disposable income is 4,000, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, national saving is equal to:

300

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

If Y=AK^.5L^.5 and A,K, and L are all 100, the marginal product of capital is

50

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 Golden and Katz, the increasing income equality of recent decades is a result of

a steady pace of technological advance and a slowdown of educational advance

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

the interest rate will fall

In the classical model with fixed income, if households want to save more than firms want to invest, then:

the interest rate will fall

the real wage will increase if

the productivity of labor increases

the real rental price of capital is the price per unit of capital measured in

units of output

the real wage is the return to labor measured in

units of output

Other things equal, an increase in the interest rate leads to

a decrease in quantity of investment goods demanded

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 labor and capital used in production, according to their productivities

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wage(s) of

both barbers and farmers should have risen over time

An example of increasing returns to scale is when capital and labor inputs:

both increase 5 percent and output increases 10 percent

If a neutral technological advance improves the production function, the neoclassical theory of distribution predicts:

both real wage and real rental price of capital will rise

investment goods as measured in GDP are purchased by

business firms and households

an increase in the supply of capital will

decrease the real rental price of capital

Assume that the consumption function is given by C = 150 + 0.85(Y - T) and the tax function is given by T = t0 + t1Y. If t0 increases by 1 unit, then consumption

decreases by .85 units

The investment function slopes ______ because there are ______ investment projects that are profitable as the interest rate decreases

downward, more

The government spending component of GDP includes all of the following except

federal spending on transfer payments

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

increase

When government spending increases and taxes are increased by an equal amount, interest rates

increase

the demand for the economy's output

is equal to consumption, investment, and government purchases

In the classical model with fixed income, a reduction in the government budget deficit will lead to a

lower real interest rate

the supply of loanable funds is equivalent to

national savings

the real interest rate is the

nominal interest rate minus the rate of inflation

Total investment in the United States averages about ______ percent of GDP

15

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

3000

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

federal governments sending a Social Security check to Betty Jones

According to the neoclassical theory of distribution, total output is divided between payments to capitol and payments to labor depending on their

marginal productivities

the marginal propensity to consume is

normally expected to be between zero and one

the equation Y=(C-T)+I(r)+G may be solved for the equilibrium level of

the interest rate

According to Euler's theorem, if competitive firms pay each other its marginal product and the production function has constant returns to scale, the sum of all factor payments will be equal to

total output

Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be

760

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

all factors of production are fully utilized

If bread is produced by using constant returns to scale production function, then if the

amount of equipment and workers are doubled, twice as much bread will be produced

Consumption depends positively on ______ and investment depends negatively on ______

disposable income, the real interest rate

the neoclassical theory of distribution explains the allocation of

income among factors of production

national savings refers to

income minus consumption minus government spending

In a Cobb-Douglas production function the marginal product of labor will increase if

the quantity of capital increases

If increased immigration raises the labor force, the neoclassical theory of distribution predicts:

the real wage will fall and the real rental price of capital will rise

According to the model developed in Chapter 3, when government spending increases and taxes increase by an equal amount

consumption and investment both decrease

If government purchases exceed taxes minus transfer payments, then the government budget is

in deficit

When factor supply is fixed and quantity of the factor is graphed on the horizontal axis while factor price is graphed on the vertical axis the factor

supply curve is vertical

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 $40 billion

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when there is a technological advance that leads to an increase in investment demand

investment is unchanged and the interest rate rises

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts:

the real wage will fall and the real rental price of capital will rise

the property of diminishing marginal product means that, after a point, when additional quantities of

a factor are added when another factor remains fixed, the marginal product of the first factor is fixed

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when:

average labor productivity is growing rapidly

According to the model developed in Chapter 3, when taxes decrease without a change in government spending

consumption increases and investment decreases

The reduction in investment brought about by the increase in the interest rate caused by increased government spending is called

crowding out

In the neoclassical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving ______ and private saving ______

decreases, increases

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

Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate.

positively, negatively

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, investment:

rises by $60 billion

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, national saving:

rises by $60 billion

The factor that makes national saving equal investment, in equilibrium, is

the interest rate

In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would

crowd out between zero and $10 billion of investment

A production function is a technological relationship between

factors of production and the quality of output produced

According to the model developed in Chapter 3, when government spending increases but taxes are not raised, interest rates

increase

In the circular flow diagram, firms receive revenue from the___________ market, which is used to purchase inputs in the ________ market

goods, factor

public saving is

government revenue minus government spending

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

When there is a fixed supply of loanable funds, an increase in investment demand results in a(n)

higher interest rate

The production function feature called "constant returns to scale" means that if we

increase capital and labor by 10 percent each, we increase output by 10 percent

In the classical model with fixed income, an increase in the real interest rate could be the result of a(n)

increase in government spending

In the classical model with fixed income a decrease in the real interest rate could be the result of a(n)

increase in taxes

Since 1960, the US ratio of labor income to total income has

been about .7

An example of decreasing returns to scale is when capital and labor inputs:

both increase 10 percent and output increase 5 percent

The price received by each factor of production for its services is determined by

demand and supply factors

A consumption function shows the relationship between consumption and

disposable income

private saving is

disposable income minus consumption

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 _____

disposable income, the interest rate, exogenously

If output is described by the production function Y = AK^0.2L^0.8 then the production function has

constant returns to scale

the neoclassical theory of distribution

is a theory of how national income is divided among the factors of production

At any particular point in time, the output of the economy

is fixed because the supplies of capital and labor and the technology are fixed

With a Cobb Douglas production function, the share of output going to labor

is independent of the amount of labor

a competitive firm

is small relative to the market which it trades

A competitive, profit maximizing firms hires labor until

price of output multiplied by the marginal product of labor equals the wage

national saving is

private saving plus public saving

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when the government lowers taxes on business investment, thus increasing desired investment, but does not change government spending or change any taxes that affect disposable income, then the quantity of investment

decrease and the interest rate rises

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

(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 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)?

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 cuts spending, holding other factors constant?

Point B

When the demand for loanable funds exceeds the supply of loanable funds, households want to save ______ than firms want to invest and the interest rate ______

less, rises

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

(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 a production function describing an economy is Y = 100 K^.25L^.75 then the share of output going to labor

is 75 percent

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

decreases by .15 units

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