3.3-3.4

71. 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

83. 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

84. The equation Y= C(Y - T) + I(r) + G may be solved for the equilibrium level of: a. income. b. consumption. c. government purchases. d. the interest rate.

d

89. 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

52. Disposable personal income is defined as income after the payment of all: a. taxes. b. interest. c. loans. d. social insurance contributions.

a

55. 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

61. 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

67. 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

63. 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

65. 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

74. Assume that the investment function is given by I = 1,000 - 30r, wherer 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

77. 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

85. 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

68. 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

73. 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

75. 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

54. 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

56. 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

60. 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

62. 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

66. Total investment in the United States averages about ______ percent of GDP. a. 10 b. 15 c. 20 d. 25

b

69. 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

50. 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

64. 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

72. 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

76. 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

79. 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

81. 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

87. 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

88. 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

70. 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

78. If government purchases exceed taxes minus transfer payments, then the government budget is: a. balanced. b. in deficit. c. in surplus. d. endogenous.

b

80. 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

86. 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

51. 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

53. A consumption function shows the relationship between consumption and: a. income. b. personal income. c. disposable income. d. taxes.

c

57. If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50 K^0.5 L^0.5, where K = 100 and L = 100, then C equals: a. 1,000. b. 2,500. c. 3,000. d. 5,000.

c

58. 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

59. 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

82. 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