Question 1

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when there is a technological advance that leads to an increase in investment demand:
A)investment increases and the interest rate rises.
B)investment is unchanged and the interest rate rises.
C)investment and the interest rate are both unchanged.
D)investment increases and the interest rate falls.

Accepted Answer

The answer of Use the model developed in Chapter 3...

Question 2

An example of increasing returns to scale is when capital and labor inputs:
A)both increase 10 percent and output increases 5 percent.
B)both increase 10 percent and output increases 10 percent.
C)both increase 5 percent and output increases 10 percent.
D)do not change and output decreases 5 percent.

Accepted Answer

Increasing returns to scale occur when the percentage increase in output is greater than the percentage increase in inputs. In option C, a 5% increase in both capital and labor results in a 10% increase in output, exemplifying increasing returns to scale.

Question 3

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when the government lowers taxes on business investment, thus increasing desired investment, but does not change government spending or change any taxes that affect disposable income:
A)investment increases and the interest rate rises.
B)investment is unchanged and the interest rate rises.
C)investment and the interest rate are both unchanged.
D)investment decreases and the interest rate rises.

Accepted Answer

The answer of Use the model developed in Chapter 3...

Question 4

Suppose that GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.5(Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. Government spending (G) is 1,000 and taxes (T) is also 1,000. When a technological innovation changes the investment function to I = 3,000 - 100r:
A)I rises by 1,000 and r rises by 10 percentage points.
B)I rises by 1,000 and r is unchanged.
C)I is unchanged and r rises by 10 percentage points.
D)I is unchanged and r rises by 15 percentage points.

Accepted Answer

The answer of Suppose that GDP (Y) is 5,000. Consumption...

Question 5

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.

Accepted Answer

Since output does not change, the increase in taxes will be offset by an increase in government spending or an increase in investment. The marginal propensity to consume is 0.6, which means that for every additional dollar of income, 60 cents will be spent on consumption. Therefore, out of the $100 billion increase in taxes, $60 billion will be offset by a decrease in consumption. The remaining $40 billion will be used to increase investment or government spending. Since the question asks about investment, we conclude that investment will rise by $60 billion.

Question 6

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wage(s) of:
A)both barbers and farmers should have remained constant over time.
B)both barbers and farmers should have risen over time.
C)farmers should have risen while the real wage of barbers should have remained constant.
D)barbers should have risen while the real wage of farmers should have remained constant.

Accepted Answer

According to the neoclassical theory of distribution, technological progress leads to an increase in productivity and therefore an increase in real wages for both farmers and barbers who can move freely between the two occupations. Therefore, option B is the correct answer.

Question 7

(Exhibit: Saving, Investment, and the Interest Rate 1) Reference: Ref 3-1 (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 raises taxes, holding other factors constant? A)Point A B)Point B C)Point C D)Point D

Accepted Answer

If the government raises taxes, it will reduce disposable income and decrease consumption, leading to a decrease in desired investment. This will shift the investment curve to the left from I₁ to IS2U1B11S2U1B0. The equilibrium point E will no longer be possible, and a new equilibrium point must be found where saving equals the new desired investment. This new equilibrium point will be at point B, where the real interest rate is higher than at point E, and both saving and investment are lower.

Question 8

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:
A)rises by $100 billion.
B)rises by $60 billion.
C)falls by $60 billion.
D)falls by $100 billion.

Accepted Answer

When the government raises lump-sum taxes on income by $100 billion and output does not change, it means that the entire amount of the tax increase goes into public saving, increasing it by $100 billion. The marginal propensity to consume affects private consumption but does not directly affect the calculation of public saving in this scenario.

Question 9

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, private saving:
A)rises by $40 billion.
B)rises by $60 billion.
C)falls by $60 billion.
D)falls by $40 billion.

Accepted Answer

With a marginal propensity to consume of 0.6, households spend 60% of any additional income they receive. When the government raises lump-sum taxes on income by $100 billion, households have $60 billion less to spend. If output does not change, this means that investment must increase by the same amount in order to make up for the decrease in consumption. Private saving is equal to income minus consumption, so it must fall by $40 billion (the remaining 40% of the $100 billion tax increase). Therefore, choice D is correct.

Question 10

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 income. This shift, in a neoclassical economy, will:
A)lower investment and raise the interest rate.
B)raise investment and lower the interest rate.
C)lower both investment and the interest rate.
D)raise both investment and the interest rate.

Accepted Answer

An increase in consumer confidence leads to higher current consumption, which in turn increases demand for funds. This higher demand for funds raises the interest rate. As the interest rate rises, the cost of borrowing increases, leading to a decrease in investment.

Question 11

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, national saving:
A)rises by $100 billion.
B)rises by $60 billion.
C)falls by $60 billion.
D)falls by $100 billion.

Accepted Answer

When lump-sum taxes are raised, income available for consumption reduces, leading to a decrease in consumption, which leads to an increase in savings. As per the question, the neoclassical economy adjusts so that output does not change, which means investment also does not change. Therefore, national saving increases by the same amount as the reduction in consumption, i.e., 0.6 times the increase in taxes. Hence, national saving rises by $60 billion (0.6 x $100 billion).

Question 12

If a neutral technological advance improves the production function, the neoclassical theory of distribution predicts:
A)the real wage will rise and the real rental price of capital will fall.
B)both the real wage and the real rental price of capital will fall.
C)both the real wage and the real rental price of capital will rise.
D)the real wage will fall and the real rental price of capital will rise.

Accepted Answer

A neutral technological advance improves productivity without favoring labor or capital specifically, leading to an increase in output. This generally allows for higher payments to both labor (real wages) and capital (real rental price), as the overall economic pie has grown.

Question 13

Use the model developed in Chapter 3, but assume that consumption decreases, other things being equal, when the interest rate rises. If there is a technological advance that leads to an increase in investment demand:
A)investment increases and the interest rate rises.
B)investment is unchanged and the interest rate rises.
C)investment and the interest rate are both unchanged.
D)investment decreases and the interest rate rises.

Accepted Answer

With the assumption that consumption decreases when the interest rate rises, an increase in investment demand would lead to a decrease in consumption, leading to a decrease in aggregate demand. To counteract this, the interest rate would need to rise to reduce investment demand and encourage savings. As a result, investment would increase and the interest rate would rise.

Question 14

When there is a fixed supply of loanable funds, an increase in investment demand results in a(n):
A)higher interest rate.
B)lower interest rate.
C)increase in investment.
D)decrease in investment.

Accepted Answer

As the demand for investment funds increases, the demand for loanable funds increases. Since the supply of loanable funds is fixed, this creates upward pressure on interest rates in order to balance the market. Therefore, the correct answer is a higher interest rate.

Question 15

An example of decreasing returns to scale is when capital and labor inputs:
A)both increase 10 percent and output increases 5 percent.
B)both increase 10 percent and output increases 10 percent.
C)both increase 5 percent and output increases 10 percent.
D)do not change and output increases 5 percent.

Accepted Answer

When both capital and labor inputs increase by 10 percent and output only increases by 5 percent, it shows a diminishing marginal productivity of inputs, which indicates decreasing returns to scale.

Question 16

(Exhibit: Saving, Investment, and the Interest Rate 2) Reference: Ref 3-2 (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)? A)Point A B)Point B C)Point C D)Point D

Accepted Answer

The answer of (Exhibit: Saving, Investment, and the Interest Rate...

Question 17

If increased immigration raises the labor force, the neoclassical theory of distribution predicts:
A)the real wage will rise and the real rental price of capital will fall.
B)both the real wage and the real rental price of capital will fall.
C)both the real wage and the real rental price of capital will rise.
D)the real wage will fall and the real rental price of capital will rise.

Accepted Answer

According to the neoclassical theory of distribution, an increase in the labor force will result in a decrease in the marginal product of labor, which will lead to a decrease in the real wage. At the same time, the increase in the supply of labor will increase the demand for capital, which will lead to an increase in the real rental price of capital. Therefore, the real wage will fall and the real rental price of capital will rise.

Question 18

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts:
A)the real wage will rise and the real rental price of capital will fall. both the real
B)wage and the real rental price of capital will fall. both the real
C)wage and the real rental price of capital will rise.
D)the real wage will fall and the real rental price of capital will rise.

Accepted Answer

According to neoclassical theory, when the capital stock is destroyed, the production process becomes less productive which leads to a decrease in both the real wage and the real rental price of capital. However, since the capital stock is now scarcer, the demand for it increases causing the real rental price of capital to rise. Meanwhile, since output has decreased, the demand for labor falls leading to a decrease in the real wage. Thus, the neoclassical theory predicts that the real wage will fall and the real rental price of capital will rise.

Question 19

In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. By doing so:
A)investment falls and the interest rate rises.
B)investment rises and the interest rate falls.
C)investment and the interest rate both fall.
D)investment and the interest rate both rise.

Accepted Answer

Lowering both government spending and taxes by the same amount reduces the government's demand for loanable funds, which decreases the interest rate. Lower interest rates make borrowing cheaper, encouraging more investment.

Question 20

When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a interest rate and in the quantity of investment.
A)higher; no change
B)higher; an increase
C)lower; no change
D)lower; an increase

Accepted Answer

When there is an increase in investment demand, the demand for loanable funds also increases which puts upward pressure on interest rates. As a result, the interest rate will increase and the quantity of investment will also increase. This is because the higher interest rate incentivizes saving, making more funds available for investment.

Quiz 3: National Income: Where It Comes From and Where It Goes

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when there is a technological advance that leads to an increase in investment demand:

An example of increasing returns to scale is when capital and labor inputs:

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when the government lowers taxes on business investment, thus increasing desired investment, but does not change government spending or change any taxes that affect disposable income:

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:

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wage(s) of:

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:

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, private saving:

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 income. This shift, in a neoclassical economy, will:

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, national saving:

If a neutral technological advance improves the production function, the neoclassical theory of distribution predicts:

Use the model developed in Chapter 3, but assume that consumption decreases, other things being equal, when the interest rate rises. If there is a technological advance that leads to an increase in investment demand:

When there is a fixed supply of loanable funds, an increase in investment demand results in a(n) :

An example of decreasing returns to scale is when capital and labor inputs:

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

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

In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. By doing so:

When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a interest rate and in the quantity of investment.