ECON 304 TEST #2
According to the model developed in Chapter 3, when government spending increases but taxes are not raised, interest rates: A) increase. B) are unchanged. C) decrease. D) can vary.
A
All of the following actions increase government purchases of goods and services except the: A) federal government's sending a Social Security check to Betty Jones. B) federal governments sending a paycheck to the president of the United States. C) federal government's buying a Patriot missile. D) city of Boston's buying a library book.
A
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: A) decreases by 0.85 units. B) decreases by 0.15 units. C) increases by 0.15 units. D) increases by 0.85 units.
A
Consumption depends positively on ______ and investment depends negatively on ______. A) disposable income; the real interest rate B) the real interest rate; disposable income C) private saving; public saving D) public saving; private saving
A
If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1000.
A
In the classical model with fixed income, an increase in the real interest rate could be the result of a(n): A) increase in government spending. B) decrease in government spending. C) decrease in desired investment. D) increase in taxes.
A
In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will: A) increase. B) decrease. C) remain unchanged. D) either increase or decrease, depending on whether consumption is greater or less than investment.
A
Other things equal, an increase in the interest rate leads to: A) a decrease in the quantity of investment goods demanded. B) no change in the quantity of investment goods demanded. C) an increase in the quantity of investment goods demanded. D) sometimes an increase and sometimes a decrease in the quantity of investment goods demanded.
A
The factor that makes national saving equal investment, in equilibrium, is: A) the interest rate. B) private saving. C) public saving. D) fiscal policy.
A
At any particular point in time, the output of the economy: A) is fixed because the supplies of capital and labor and the technology are fixed. B) is fixed because the demand for goods and services is fixed. C) varies because the supplies of capital and labor vary. D) varies because the technology for turning capital and labor into goods and services varies.
A) is fixed because the supplies of capital and labor and the technology are fixed
A competitive firm: A) is small relative to the market in which it trades. B) has to charge a lower price when it wants to sell more goods. C) has several large competitors with whom it engages in fierce competition. D) can set the wage at which it hires workers.
A) is small relative to the market in which it trades
If saving exceeds investment demand, and consumption is not a function of the interest rate: A) the demand for loans exceeds the supply of loans. B) the interest rate will fall. C) the interest rate will rise. D) saving will fall.
B
If the consumption function is given by C = 150 + 0.85(Y - T) and T increases by 1 unit, then savings: A) decreases by 0.85 units. B) decreases by 0.15 units. C) increases by 0.15 units. D) increases by 0.85 units.
B
Private saving is: A) income minus consumption minus government spending. B) disposable income minus consumption. C) disposable income minus government spending. D) taxes minus government spending.
B
Since 1960, the U.S. ratio of labor income to total income has: A) been about 2.5 to 1. B) been about 0.7. C) increased steadily. D) decreased steadily.
B
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: A) rises by $100 billion. B) rises by $60 billion. C) falls by $60 billion. D) falls by $100 billion.
B
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: A) rises by $100 billion. B) rises by $60 billion. C) falls by $60 billion. D) falls by $100 billion.
B
Total investment in the United States averages about ______ percent of GDP. A) 10 B) 15 C) 20 D) 25
B
The production function feature called "constant returns to scale" means that if we: A) multiply capital by z1 and labor by z2, we multiply output by z3. B) increase capital and labor by 10 percent each, we increase output by 10 percent. C) increase capital and labor by 5 percent each, we increase output by 10 percent. D) increase capital by 10 percent and increase labor by 5 percent, we increase output by 7.5 percent.
B) increase capital and labor by 10 percent each, we increase output by 10 percent
A firm's economic profit is: A) the price of output minus the wage minus the rental price of capital. B) revenue minus costs. C) revenue plus capital costs. D) the price of output minus labor costs.
B) revenue minus costs
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: A) supply curve is horizontal. B) supply curve is vertical. C) supply curve slopes up to the right. D) demand curve slopes up to the right.
B) supply curve is vertical
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: A) 1,500. B) 2,000. C) 2,500. D) 3,000.
A
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: A) 560. B) 840. C) 1,120. D) 2,120.
A
Disposable personal income is defined as income after the payment of all: A) taxes. B) interest. C) loans. D) social insurance contributions.
A
Estimates by Goldin and Katz indicate that the financial returns of a year of college _____ between 1980 and 2005. A) increased. B) decreased. C) did not change. D) were negative.
A
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: A) 300. B) 500. C) 700. D) 1,000.
A
In a Cobb-Douglas production function the marginal product of capital will increase if: A) the quantity of labor increases. B) the quantity of capital increases. C) labor's share of output increases. D) average capital productivity decreases.
A
In a closed economy, Y - C - G equals: A) national saving. B) private saving. C) public saving. D) financial saving.
A
According to the model developed in Chapter 3, when government spending increases without a change in taxes: A) consumption increases. B) consumption decreases. C) investment increases. D) investment decreases.
D
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: A) only to the labor used in production. B) partly between labor and capital used in production, with the surplus going to the owners of the firm as profits. C) equally between the labor and capital used in production. D) between the labor and capital used in production, according to their marginal productivities.
D
According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their: A) supply. B) equilibrium growth rates. C) relative political power. D) marginal productivities.
D
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: A) rises by $40 billion. B) rises by $60 billion. C) falls by $60 billion. D) falls by $40 billion.
D
The home that would have the highest mortgage payment on a 30-year fixed-rate mortgage would be a home with a mortgage of: A) $200,000 at 8 percent. B) $100,000 at 12 percent. C) $100,000 at 8 percent. D) $200,000 at 12 percent.
D
The investment function slopes ______ because there are ______ investment projects that are profitable as the interest rate decreases. A) upward; fewer B) upward; more C) downward; fewer D) downward; more
D
The real interest rate is the: A) rate of interest actually paid by consumers. B) rate of interest actually paid by banks. C) rate of inflation minus the nominal interest rate. D) nominal interest rate minus the rate of inflation.
D
When government spending increases and taxes are increased by an equal amount, interest rates: A) increase. B) remain the same. C) decrease. D) can vary wildly.
A
Unlike the real world, the classical model with fixed output assumes that: A) all factors of production are fully utilized. B) all capital is fully utilized but some labor is unemployed. C) all labor is fully employed but some capital lies idle. D) some capital lies idle and some labor is unemployed.
A) all factors of production are fully utilized
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.
A) factors of production and production function
Government transfer payments: A) are included as part of government purchases, G. B) can be viewed as negative tax payments, T. C) are received as payment for inputs in the factor market. D) do not affect the level of public or private saving.
B
If government purchases exceed taxes minus transfer payments, then the government budget is: A) balanced. B) in deficit. C) in surplus. D) endogenous.
B
If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is: A) 300. B) 500. C) 1,000. D) 1,300.
B
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: A) 2,500. B) 2,800. C) 3,500. D) 4,200.
B
If the production function describing an economy is Y = 100 K.25L.75, then the share of output going to labor: A) is 25 percent. B) is 75 percent. C) depends on the quantities of labor and capital. D) depends on the state of technology.
B
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) decrease. C) remain unchanged. D) either increase or decrease, depending on whether consumption is greater or less than investment.
B
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 ______. A) increases; increases. B) increases; does not change C) decreases; increases D) decreases; does not change
B
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: A) investment increases and the interest rate rises. B) investment is unchanged and the interest rate rises. C) investment and the interest rate are both unchanged. D) investment increases and the interest rate falls.
B
A consumption function shows the relationship between consumption and: A) income. B) personal income. C) disposable income. D) taxes.
C
According to the model developed in Chapter 3, when taxes are increased but government spending is unchanged, interest rates: A) increase. B) are unchanged. C) decrease. D) can vary wildly.
C
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: A) 600. B) 1,100. C) 1,500. D) 2,200.
C
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: A) 240. B) 700. C) 760. D) 970.
C
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: A) 0.3 and 0.3. B) 0.7 and 0.7. C) 0.3 and 0.7. D) 0.7 and 0.3.
C
If a neutral technological advance improves the production function, the neoclassical theory of distribution predicts: 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 fall. C) both the real wage and the real rental price of capital will rise. D) the real wage will fall and the real rental price of capital will rise.
C
If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by: A) 0.15 units. B) 0.5 units. C) 0.85 units. D) 1 unit.
C
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: A) 1,000. B) 2,500. C) 3,000. D) 5,000.
C
In a closed economy with fixed output, when government spending increases: A) private saving decreases. B) private saving increases. C) public saving decreases. D) public saving increases.
C
In a closed economy, the components of GDP are: A) consumption, investment, government purchases, and exports. B) consumption, investment, government purchases, and net exports. C) consumption, investment, and government purchases. D) consumption and investment.
C
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: A) increases and the interest rate rises. B) is unchanged and the interest rate rises. C) and the interest rate are both unchanged. D) decreases and the interest rate rises.
D
What determines the distribution of national income between labor and capital in a competitive, profit-maximizing economy with constant returns to scale? A) the relative quantity of labor to capital B) the interest rate C) the ratio of public saving to private saving D) the marginal productivity of labor relative to the marginal productivity of capital
D
When economists speak of "the" interest rate, they mean: A) the rate on 90-day Treasury bills. B) the rate on 30-year government bonds. C) the "prime" rate on loans. D) no particular interest rate, since it is assumed that various interest rates tend to move up and down together.
D
A competitive, profit-maximizing firm hires labor until the: A) marginal product of labor equals the wage. B) price of output multiplied by the marginal product of labor equals the wage. C) real wage equals the real rental price of capital. D) wage equals the rental price of capital.
B) price of output multiplied by the marginal product of labor equals the wage
In the long run, what determines the level of total production of goods and services in an economy? A) the interest rate and the amount of national saving B) the quantity of capital, quantity of labor, and production technology C) consumption, investment, and government spending D) the marginal products of capital and labor, constant returns to scale, and competition
B) the quantity of capital, quantity of labor, and production technology
The real rental price of capital is the price per unit of capital measured in: A) dollars. B) units of output. C) units of labor. D) units of capital.
B) units of output
The real wage is the return to labor measured in: A) dollars. B) units of output. C) units of labor. D) units of capital.
B) units of output
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 ______. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; does not change
C
Public saving is: A) always positive. B) always negative. C) always zero. D) either positive, negative, or zero.
D
The equation may be solved for the equilibrium level of: A) income. B) consumption. C) government purchases. D) the interest rate.
D
The reduction in investment brought about by the increase in the interest rate caused by increased government spending is called: A) a budget deficit. B) fiscal policy. C) the identification problem. D) crowding out.
D
With a Cobb-Douglas production function, the share of output going to labor: A) decreases as the amount of labor increases. B) increases as the amount of labor increases. C) increases as the amount of capital increases. D) is independent of the amount of labor.
D
The circular flow model shows that households use income for: A) consumption, saving, and factor payments. B) consumption, taxes, and factor payments. C) taxes, saving, and factor payments. D) consumption, taxes, and saving.
D) consumption, taxes, and saving
If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, public saving is: A) -200. B) 200. C) 500. D) 1,800.
A
If output is described by the production function Y = AK 0.2L0.8, then the production function has: A) constant returns to scale. B) diminishing returns to scale. C) increasing returns to scale. D) a degree of returns to scale that cannot be determined from the information given.
A
In examining the impact of fiscal policy, it is assumed that: A) consumption, investment, and the interest rate are endogenous variables. B) consumption, investment, and the interest rate are exogenous variables. C) government purchases, taxes, and interest rates are endogenous variables. D) government purchases, taxes, and interest rates are exogenous variables.
A
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) high; exceeds B) high; falls short of C) low; exceeds D) low; falls short of
A
Skill-based technological change ______ the demand for high-skilled workers, while the slowdown in the pace of educational advancement reduces the supply of skilled workers, resulting in relatively _____ wages for skilled workers. A) increases; higher B) increases; lower C) decreases; higher D) decreases; lower
A
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: A) rises by $100 billion. B) rises by $60 billion. C) falls by $60 billion. D) falls by $100 billion.
A
The marginal propensity to consume is: A) normally expected to be between zero and one. B) equal to consumption divided by disposable income. C) normally assumed to decrease as disposable income increases. D) normally assumed to increase as disposable income increases.
A
The nominal interest rate is the: A) rate of interest that investors pay to borrow money. B) same as the real interest rate. C) rate of inflation minus the real rate of interest. D) real rate of interest minus the rate of inflation.
A
The supply of loanable funds is equivalent to: A) national saving. B) private saving. C) public saving. D) investment.
A
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: A) investment increases and the interest rate rises. B) investment is unchanged and the interest rate rises. C) investment and the interest rate are both unchanged. D) investment decreases and the interest rate rises.
A
When there is a fixed supply of loanable funds, an increase in investment demand results in a(n): A) higher interest rate. B) lower interest rate. C) increase in investment. D) decrease in investment.
A
According to the model developed in Chapter 3, when government spending increases and taxes increase by an equal amount: A) consumption and investment both increase. B) consumption and investment both decrease. C) consumption increases and investment decreases. D) consumption decreases and investment increases.
B
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. A) higher; no change B) higher; an increase C) lower; no change D) lower; an increase
B
The marginal product of capital is: A) output divided by capital input. B) additional output produced when one additional unit of capital is added. C) additional output produced when one additional unit of capital and one additional unit of labor are added. D) value of additional output when one dollar's worth of additional capital is added.
B) additional output produced when one additional unit of capital is added
The marginal product of labor is: A) output divided by labor input. B) additional output produced when one additional unit of labor is added. C) additional output produced when one additional unit of labor and one additional unit of capital are added. D) value of additional output when one dollar's worth of additional labor is added.
B) additional output produced when one additional unit of labor is added
Economic profit is zero if: A) all factors are paid their marginal products and the law of diminishing returns is valid. B) all factors are paid their marginal products and there are constant returns to scale. C) all firms maximize profits and none are competitive. D) all firms maximize profits and all factors are paid their marginal products.
B) all factors are paid their marginal products and there are constant returns to scale
An increase in the supply of capital will: A) increase the real rental price of capital. B) decrease the real rental price of capital. C) increase the productivity of capital. D) decrease the real interest rate.
B) decrease the real rental price of capital
In the circular flow model, households receive income from the _____ market and save through the _____ market. A) goods; financial B) factor; financial C) goods; factor D) factor; goods
B) factor; financial
The real wage will increase if: A) the supply of labor increases. B) the productivity of labor increases. C) the price of output increases. D) the supply of capital decreases.
B) the productivity of labor increases
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: A) I rises by 1,000 and r rises by 10 percentage points. B) I rises by 1,000 and r is unchanged. C) I is unchanged and r rises by 10 percentage points. D) I is unchanged and r rises by 15 percentage points.
C
The demand for output in a closed economy is the sum of: A) public saving and private saving. B) the quantity of capital and labor and production technology. C) consumption, investment, and government spending. D) government purchases and transfer payments minus tax receipts.
C
The demand for the economy's output: A) is always equal to the supply, regardless of the interest rate. B) may be computed provided that we know disposable income. C) is equal to consumption, investment, and government purchases. D) is determined by government purchases and taxes.
C
The supply and demand for loanable funds determines the: A) real wage. B) real rental price of capital. C) real interest rate. D) nominal interest rate.
C
An example of decreasing returns to scale is when capital and labor inputs: A) both increase 10 percent and output increases 5 percent. B) both increase 10 percent and output increases 10 percent. C) both increase 5 percent and output increases 10 percent. D) do not change and output increases 5 percent.
A
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: A) lower investment and raise the interest rate. B) raise investment and lower the interest rate. C) lower both investment and the interest rate. D) raise both investment and the interest rate.
A
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: A) not build because the rate of return on the factory is only 6 percent. B) not build because the rate of return on the factory is only 12 percent. C) build because the rate of return on the factory is 30 percent. D) build because the rate of return on the factory is 35 percent.
B
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: A) 6 percent. B) 12 percent. C) 18 percent. D) 30 percent.
B
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: A) 2 percent. B) 5 percent. C) 10 percent. D) 20 percent.
B
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: A) 85. B) 425. C) 500. D) 525.
B
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: A) increases by about 10 percent. B) increases by about 7 percent. C) increases by about 3 percent. D) does not increase since the new workers are unemployed.
B
Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate. A) positively; positively B) positively; negatively C) negatively; negatively D) negatively; positively
B
Crowding out occurs when an increase in government spending ______ the interest rate and investment ______. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases
B
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: A) both barbers and farmers should have remained constant over time. B) both barbers and farmers should have risen over time. C) farmers should have risen while the real wage of barbers should have remained constant. D) barbers should have risen while the real wage of farmers should have remained constant.
B
In a Cobb-Douglas production function the marginal product of labor will increase if: A) the quantity of labor increases. B) the quantity of capital increases. C) capital's share of output increases. D) average labor productivity decreases.
B
In a closed economy, private saving equals: A) Y - C - G. B) Y - T - C. C) Y - I - C. D) Y - T.
B
In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. By doing so: A) investment falls and the interest rate rises. B) investment rises and the interest rate falls. C) investment and the interest rate both fall. D) investment and the interest rate both rise.
B
In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would: A) still crowd out exactly $10 billion of investment. B) crowd out between zero and $10 billion of investment. C) not crowd out any investment. D) crowd out more than $10 billion of investment.
B
In the United Kingdom between 1730 and 1920, during wartime, government spending tended to increase: A) but the interest rate did not increase. B) and the interest rate also increased. C) but the interest rate decreased. D) and the interest rate remained constant.
B
In the classical model with fixed income, a reduction in the government budget deficit will lead to a: A) higher real interest rate. B) lower real interest rate. C) higher level of output. D) lower level of output.
B
In the classical model with fixed income, if households want to save more than firms want to invest, then: A) the interest rate rises. B) the interest rate falls. C) output increases. D) output falls.
B
According to Goldin and Katz, the increasing income inequality of recent decades is the result of: A) increases in the rates of technological advance and educational attainment. B) decreases in the rates of technological advance and educational attainment. C) a steady pace of technological advance and a slowdown in educational advance. D) a decrease in the rate of technological advance and an increase in the rate of educational advance.
C
According to the model developed in Chapter 3, when taxes decrease without a change in government spending: A) consumption and investment both increase. B) consumption and investment both decrease. C) consumption increases and investment decreases. D) consumption decreases and investment increases.
C
According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity is growing rapidly: labor's share of total income will be increasing. labor's share of income will be decreasing. workers will experience high rates of real wage growth. economic profits will be positive.
C
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: A) real interest rates are high. B) real interest rates are low. C) average labor productivity is growing rapidly. D) capital's share of income is growing rapidly.
C
An example of increasing returns to scale is when capital and labor inputs: A) both increase 10 percent and output increases 5 percent. B) both increase 10 percent and output increases 10 percent. C) both increase 5 percent and output increases 10 percent. D) do not change and output decreases 5 percent.
C
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: A) 70. B) 140. C) 175. D) 250.
C
If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings: A) decreases by 0.85 units. B) decreases by 0.15 units. C) increases by 0.15 units. D) increases by 0.85 units.
C
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: A) rise $100 billion. B) rise $60 billion. C) rise $40 billion. D) not change.
C
In equilibrium, total investment equals: A) private saving. B) public saving. C) national saving. D) household saving.
C
In the classical model with fixed income a decrease in the real interest rate could be the result of a(n): A) increase in government spending. B) increase in desired investment. C) increase in taxes. D) decrease in taxes.
C
Investment goods as measured in the GDP are purchased by: A) business firms alone. B) households alone. C) business firms and households. D) business firms, households, and governments.
C
National saving is: A) private saving. B) public saving. C) private saving plus public saving. D) private saving minus public saving.
C
National saving refers to: A) disposable income minus consumption. B) taxes minus government spending. C) income minus consumption minus government spending. D) income minus investment.
C
The government spending component of GDP includes all of the following except: A) federal spending on goods. B) state and local spending on goods. C) federal spending on transfer payments. D) federal spending on services.
C
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: A) space exploration. B) capital expenditures. C) education. D) transfer payments.
C
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 ______. A) more; rises B) more; falls C) less; rises D) less; falls
C
If bread is produced by using a constant returns to scale production function, then if the: A) number of workers is doubled, twice as much bread will be produced. B) amount of equipment is doubled, twice as much bread will be produced. C) amounts of equipment and workers are both doubled, twice as much bread will be produced. D) amounts of equipment and workers are both doubled, four times as much bread will be produced.
C) amounts of equipment and workers are both doubled, twice as much bread will be produced
The two most important factors of production are: A) goods and services. B) labor and energy. C) capital and labor. D) saving and investment.
C) capital and labor
If an increase of an equal percentage in all factors of production results in an increase in output of the same percentage, then a production function has the property called: A) constant marginal product of labor. B) increasing marginal product of labor. C) constant returns to scale. D) increasing returns to scale.
C) constant returns to scale
Accounting profit is: A) economic profit minus the return to capital. B) equal to economic profit. C) economic profit plus the return to capital. D) equal to the economic return to capital.
C) economic profit plus the return to capital
A production function is a technological relationship between: A) factor prices and the marginal product of factors. B) factors of production and factor prices. C) factors of production and the quantity of output produced. D) factor prices and the quantity of output produced.
C) factors of production and the quantity of output produced
In the circular flow diagram, firms receive revenue from the _____ market, which is used to purchase inputs in the _____ market. A) goods; financial B) factor; financial C) goods; factor D) factor; goods
C) goods; factor
The neoclassical theory of distribution explains the allocation of: A) output between goods and services. B) output among consumption, investment, and government spending. C) income among factors of production. D) income between saving and investment.
C) income among factors of production
A competitive firm chooses the: A) price at which to sell the product produced. B) wage to pay labor. C) quantity of labor and capital to employ. D) rental price to pay capital.
C) quantity of labor and capital to employ
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: A) 5 percent. B) 8 percent. C) 10 percent. D) 13 percent.
D
If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts: 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 fall. C) both the real wage and the real rental price of capital will rise. D) the real wage will fall and the real rental price of capital will rise.
D
If increased immigration raises the labor force, the neoclassical theory of distribution predicts: 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 fall. C) both the real wage and the real rental price of capital will rise. D) the real wage will fall and the real rental price of capital will rise.
D
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) the interest rate; disposable income; by tax revenue B) the real wage; the real rental price of capital; by factor prices C) labor's share of output; capital's share of output; by the interest rate D) disposable income; the interest rate; exogenously
D
In fourteenth-century Europe, the bubonic plague: A) reduced the population of Europe by about one-half. B) substantially increased economic output in Europe. C) substantially increased real rentals on land in Europe. D) substantially increased real wages in Europe.
D
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. A) high; exceeds B) high; falls short of C) low; exceeds D) low; falls short of
D
In the classical model with fixed output, the supply and demand for goods and services are balanced by: A) government spending. B) taxes. C) fiscal policy. D) the interest rate.
D
Public saving is: A) income minus consumption minus government spending. B) disposable income minus consumption. C) disposable income minus government spending. D) government revenue minus government spending.
D
The demand for loanable funds is equivalent to: A) national saving. B) private saving. C) public saving. D) investment.
D
The property of diminishing marginal product means that, after a point, when additional quantities of: A) a factor are added, output diminishes. B) both labor and capital are added, output diminishes. C) both labor and capital are added, the marginal product of labor diminishes. D) a factor is added when another factor remains fixed, the marginal product of that factor diminishes.
D) a factor is added when another factor remains fixed, the marginal product of that factor diminishes
The price received by each factor of production for its services is determined by: A) demand for output and supply of factors. B) demand for factors and supply of output. C) demand and supply of output. D) demand and supply of factors.
D) demand and supply of factors
The neoclassical theory of distribution: A) was developed by Karl Marx. B) is rejected by most economists today. C) shows that the national income of an economy is not equal to total output. D) is a theory of how national income is divided among the factors of production.
D) is a theory of how national income is divided among the factors of production
An economy's factors of production and its production function determine the economy's: A) labor force participation rate. B) budget surplus or deficit. C) population growth rate. D) output of goods and services.
D) output of goods and services
In the classical model, what adjusts to eliminate any unemployment of labor in the economy? A) the average price level B) the interest rate C) the real rental price of capital D) the real wage
D) the real wage
According to Euler's theorem, if competitive firms pay each factor its marginal product and the production function has constant returns to scale, the sum of all factor payments will equal: A) total investment. B) total saving. C) total profits. D) total output.
D) total output