Quiz3Macroeconomics

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. In addition, assume G=0. In this case, equilibrium investment is:

1,500

The two most important factors of production are:

capital and labor.

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

decreases by 0.15 units.

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

downward; more

The marginal propensity to consume is:

expected to be between zero and one.

In the long run, the level of national income in an economy is determined by its:

factors of production and production function.

Public saving is:

government revenue minus government spending.

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

increases; does not change

The demand for loanable funds is equivalent to:

investment.

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 level of disposable income. This shift, in a neoclassical economy, will:

lower investment and raise the interest rate.

In a closed economy, Y - C - G equals:

national saving.

The real interest rate is the:

nominal interest rate minus the rate of inflation.

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

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

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

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

The supply of loanable funds is equivalent to:

national saving.

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 Cobb-Douglas production function, the marginal product of labor will increase if:

the quantity of capital increases.

If an increase of an equal percentage in all factors of production increases output of the same percentage, then a production function has the property called:

constant returns to scale.

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

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