Econ320 Test #1 / Set #2
Government raises lump-sum taxes on income by $100 billion and the neoclassical economy adjusts so that output does not change.
60 Billion - Multiply income by Propensity to consume (.6 in this case)
What happens when taxes decrease without a change in government spending?
Consumption increases and equilibrium investment decreases
Demand for output in a closed economy is the sum of:
Consumption, investment and government spending
What happens when taxes are increased but government spending is unchanged? Interest rates:
Decrease
Consumption function shows the relationship between consumption and:
Disposable income
Investment function slopes ___ because there are ___ investment projects that are profitable as the interest rate decreases
Downward; more
What happens when government spending increases without a change in taxes?
Equilibrium investment decreases
Government cuts spending, holding other factors constant - GRAPH
Government cuts spending - Aggregate demand in the economy falls and a fall in the aggregate demand implies an increase in savings so S1 shifts to S3
Government cuts taxes, other factors constant - GRAPH
Increase in taxes implies a decrease in disposable income, so savings reduce because less is saved
If the consumption function is given by C=150+.85 (Y - T) and T increases by 1 unit then savings:
Increases by .85 units *RESEARCH
What happens when consumption does not depend on the interest rate - and there is a technological advancement that leads to an increase in investment demand
Investment is unchanged and interest rate rises
New equilibrium combo of real interest rate, saving and investment if there is a technological innovation that increases the demand for investment goods - GRAPH
More technological innovation, demand will be more, so investment shall be more
In equilibrium, total investment equals
National Saving
Consumption depends ___ on disposable income, and investment depends ____ on the real interest rate
Positively; negatively
Tax law change that makes investment projects less profitable and decreases the demand for investment goods (does not change the amount of taxes collected in the economy) - GRAPH
When investment projects are less profitable, then investment will decrease leading to a downward shift in the investment curve
If the production function describing an economy is Y=100 K^.25 L^.75 then the share of output going to labor:
is 75%
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
Real wage will increase if:
the productivity of labor increases
If the consumption function given by C=150+85Y and Y increases by 1 unit then C increases by
.15 *RESEARCH
