Chapter 3

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

the interest rate falls.

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

the quantity of labor increases.

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:

total output.

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.

An increase in the supply of capital will:

decrease the real rental price of capital.

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

decrease.

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 0.85 units.

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

demand and supply of factors.

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

downward; more

A production function is a technological relationship between:

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.

goods; factor

Public saving is:

government revenue minus government spending.

National saving refers to:

income minus consumption minus government spending.

Skill-biased 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.

increases; higher

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

investment decreases.

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.

A competitive firm chooses the:

quantity of labor and capital to employ.

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:

0.3 and 0.7.

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:

1,500

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

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:

2,800

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

If Y = AK^0.5 L^0.5 and A, K, and L are all 100, the marginal product of capital is:

50

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

output of goods and services.

The marginal product of capital 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.

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:

constant returns to scale.

If the production function describing an economy is Y = 100 K.25L.75, then the share of output going to labor:

is 75 percent.

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

marginal productivities

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

national saving.

The supply of loanable funds is equivalent to:

national saving.

The real interest rate is the:

nominal interest rate minus the rate of inflation.