309:Chapter 3 Practice Exam Questions

All of the following items directly raise the disposable income of U.S. households except the: A) federal government's sending a Social Security check to Betty Jones. B) federal government's sending a pay check to the president of the United States. C) federal government's buying a Patriot missile. D) city of Boston's sending a pay check to a school librarian.

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

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) normally expected to be between zero and one.

Assume that equilibrium GDP (Y) is 5,000. Consumption 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) 5 percent.

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.

If government purchases exceed taxes minus transfer payments, then the government budget is: A) balanced. B) in deficit. C) in surplus. D) endogenous

B) in deficit.

The government raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amounts? a. Public saving. b. Private saving. c. National saving. d. Investment.

Public saving increases by $100 billion Private saving will decrease by $40 billion. National saving will increase by $60 billion. Investment will increase by $60 billion.

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.

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) increases; decreases

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.

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) rises by $60 billion.

In a closed economy, the components of GDP are: A) consumption, investment, government purchases, and exports. B) consumption, investment, government purhases, and net exports. C) consumption, investment, and government purchases. D) consumption and investment.

C) consumption, investment, and government purchases.

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) federal spending on transfer payments

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) less; rises

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

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) crowding out.

Public saving is: A) always positive. B) always negative. C) always zero. D) either positive, negative, or zero.

D) either positive, negative, or zero.

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

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) nominal interest rate minus the rate of inflation