Question 1

Consider a competitive economy in which factor prices adjust to keep the factors of production fully employed and the interest rate adjusts to keep the supply and demand for goods and services in equilibrium. The economy can be described by the following set of equations: Y = AK^aL^{(1 -}^a⁾ Y = C + I + G C = C(Y - T) I = I(r) How does an increase in government spending, holding other factors constant, affect the level of: a.public saving? b.private saving? c.national saving? d.the equilibrium interest rate? e.the equilibrium quantity of investment?

Accepted Answer

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Question 2

Assume that the production function is given by Y = AK^0.5L^0.5, where Y is GDP, K is capital stock, and L is labour. The parameter A is equal to 10. Assume also that capital is 100, labour is 400, and both capital and labour are paid for their marginal products. a.What is Y? b.What is the real wage of labour? c.What is the real rental price of capital (the amount of output paid per unit of capital)?

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Question 3

Assume that the production function is Cobb-Douglas with parameter α = 0.3. If capital and labour are paid their marginal products, they receive the shares of income:
A)0.3 and 0.3.
B)0.7 and 0.7.
C)0.3 and 0.7.
D)0.7 and 0.3.

Accepted Answer

In a Cobb-Douglas production function, the parameter α represents the output elasticity of capital, meaning capital receives a share of income equal to α (0.3), and labor receives the remaining share, which is 1 - α (0.7).

Question 4

The production of an economy is explained by a function Y = 20 (L^.5K^.5), where L is labour and K is capital with L = 400 and K = 400. Does this economy support constant returns to scale?

Accepted Answer

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Question 5

The government of an economy has increased its spending and its taxes by the same amount. What is the effect on investment?

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Question 6

Consider two competitive economies that have the same quantities of labour (L = 400) and capital (K = 400), as well as the same technology (A = 100). The economies of the countries are described by the following Cobb-Douglas production functions: North Economy: Y = A L^.3K^.7 South Economy: Y = A L^.7K^.3 a.Which economy has the larger total production? Explain. b.In which economy is the marginal product of labour larger? Explain. c.In which economy is the real wage larger? Explain. d.In which economy is labour's share of income larger? Explain.

Accepted Answer

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Question 7

Assume that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 1,000 + 0.3(Y - T). Investment (I) is given by the equation I = 1,500 - 50r, where r is the real interest rate, in percent. Taxes (T) are 1,000, and government spending (G) is 1,500.
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a.What are the equilibrium values of C, I, and r?
b.What are the values of private saving, public saving, and national saving?
c.Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to I = 2,000 - 50r. What are the new equilibrium values of C, I, and r?
d.What are the new values of private saving, public saving, and national saving?​​

Accepted Answer

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Question 8

Assume that the production function is Cobb-Douglas with parameter α = 0.3. In the neoclassical model, if the labour force increases by 10 percent, then output:
A)increases by about 10 percent.
B)increases by about 7 percent.
C)increases by about 3 percent.
D)does not increase since the new workers are unemployed.

Accepted Answer

In the Cobb-Douglas production function, output is proportional to labor raised to the power of alpha. If the labor force increases by 10 percent, output will increase by about 7 percent (0.1 * 0.3 = 0.03, or 3 percent, and 1 + 0.03 = 1.07, or 7 percent).

Question 9

Assume that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 1,200 + 0.3(Y - T) - 50r, where r is the real interest rate, in percent. Investment (I) is given by the equation I = 1,500 - 50r. Taxes (T) are 1,000, and government spending (G) is 1,500.
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a.What are the equilibrium values of C, I, and r?
b.What are the values of private saving, public saving, and national saving?
c.Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to I = 2,000 - 50r. What are the new equilibrium values of C, I, and r?
d.What are the new values of private saving, public saving, and national saving?​

Accepted Answer

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

Question 10

Assume that a competitive economy can be described by a constant returns to scale (Cobb-Douglas) production function, and all factors of production are fully employed. Holding other factors constant, including the quantity of labour and technology, carefully explain how a one-time, 50-percent decrease in the quantity of capital (perhaps the result of war damage) will change each of the following:
​
a.the level of output produced
b.the real wage of labour
c.the real rental price of capital
d.capital's share of total income​​

Accepted Answer

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Question 11

In an economy with flexible prices, competitive factor markets, and fixed supplies of the factors of production, graphically illustrate the impact of a change in immigration policy in a country that permits a huge influx of foreign workers into the labour market, ceteris paribus. Be sure to label the axes, the curves, the initial equilibrium values, the direction the curve's shift, and the terminal equilibrium values. Explain in words how the equilibrium values of labour, the real wage, saving, investment, and the real interest rate change.

Accepted Answer

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Question 12

Assume that a competitive economy can be described by a constant returns to scale (Cobb-Douglas) production function and all factors of production are fully employed. Holding other factors constant, including the quantity of capital and technology, carefully explain how a one-time, 10-percent increase in the quantity of labour (perhaps as a result of a special immigration policy) will change each of the following:
​
a.the level of output produced
b.the real wage of labour
c.the real rental price of capital
d.labour's share of total income​​

Accepted Answer

The answer of Assume that a competitive economy can be...

Question 13

What effect does advancement in technology have on the equilibrium real rental price and capital, assuming that the supply of capital is fixed?

Accepted Answer

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Question 14

Price flexibility plays a key role in the classical model by ensuring that the markets reach equilibrium.
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a.Explain which price adjusts to bring equilibrium in the labour market. Describe how the price adjusts when demand exceeds supply in this market.
b.Explain which price adjusts to bring equilibrium in the loanable funds market. Describe how the price adjusts when supply exceeds demand in this market.

Accepted Answer

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Question 15

After studying the circular flow of dollars in the economy, explain with an example how saving done by households goes back into the circular flow. In reality, is all household saving used as investment?

Accepted Answer

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Question 16

Consider a production function for an economy: Y = 20(L^.5K^.4N^.1) where L is labour, K is capital, and N is land. In this economy, the factors of production are in fixed supply with L = 100, K = 100, and N = 100. a.What is the level of output in this country? b.Does this production function exhibit constant returns to scale? Demonstrate by example. c.If the economy is competitive so that factors of production are paid the value of their marginal products, what is the share of total income that will go to land?

Accepted Answer

The answer of Consider a production function for an economy:
Y...

Question 17

Assume that GDP (Y) is 6,000. Consumption (C) is given by the equation C = 600 + 0.6(Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real rate of interest, in percent. Taxes (T) are 500, and government spending (G) is also 500.
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a.What are the equilibrium values of C, I, and r?
b.What are the values of private saving, public saving, and national saving?
c.If government spending rises to 1,000, what are the new equilibrium values of C, I, and r?
d.What are the new equilibrium values of private saving, public saving, and national saving?​

Accepted Answer

The answer of Assume that GDP (Y) is 6,000. Consumption...

Question 18

Consider a competitive economy in which factor prices adjust to keep the factors of production fully employed. In addition, the interest rate adjusts to keep the supply and demand for goods and services in equilibrium. The economy can be described by the following set of equations: Y = AK^aL^{(1 -}^a⁾ Y = C + I + G C = C(Y - T) I = I(r) Suggest at least two policies that a government could use to increase the equilibrium quantity of investment in the economy and carefully explain how these policies produce this result.

Accepted Answer

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Question 19

In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would:
A)still crowd out exactly $10 billion of investment.
B)crowd out between zero and $10 billion of investment.
C)not crowd out any investment.
D)crowd out more than $10 billion of investment.

Accepted Answer

In a neoclassical economy, an increase in government spending would put downward pressure on the interest rate, leading to an increase in consumption and a decrease in investment. However, the extent of crowding out depends on the elasticity of investment demand. If investment demand is highly elastic, then a small decrease in the interest rate will lead to a large increase in investment, and crowding out will be minimal. If investment demand is relatively inelastic, then a decrease in the interest rate will only have a small effect on investment, and crowding out will be more significant. Therefore, a $10 billion rise in government spending will crowd out between zero and $10 billion of investment, depending on the elasticity of investment demand.

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

Assume that the production function is Cobb-Douglas with parameter α = 0.3. If capital and labour are paid their marginal products, they receive the shares of income:

The production of an economy is explained by a function Y = 20 (L.5K.5), where L is labour and K is capital with L = 400 and K = 400. Does this economy support constant returns to scale?

The government of an economy has increased its spending and its taxes by the same amount. What is the effect on investment?

Assume that the production function is Cobb-Douglas with parameter α = 0.3. In the neoclassical model, if the labour force increases by 10 percent, then output:

What effect does advancement in technology have on the equilibrium real rental price and capital, assuming that the supply of capital is fixed?

After studying the circular flow of dollars in the economy, explain with an example how saving done by households goes back into the circular flow. In reality, is all household saving used as investment?

In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would:

The production of an economy is explained by a function Y = 20 (L^.5K^.5), where L is labour and K is capital with L = 400 and K = 400. Does this economy support constant returns to scale?