Question 1

Estimates by Goldin and Katz indicate that the financial returns of a year of college _____ between 1980 and 2005.
A) increased.
B) decreased.
C) did not change.
D) were negative.

Accepted Answer

According to Goldin and Katz, the financial returns of a year of college increased between 1980 and 2005.

Question 2

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings:
A) decreases by 0.85 units.
B) decreases by 0.15 units.
C) increases by 0.15 units.
D) increases by 0.85 units.

Accepted Answer

Savings is the part of income not consumed. If Y increases by 1 unit, consumption increases by 0.85 units (0.85Y), so savings increase by the remaining 0.15 units.

Question 3

Disposable personal income is defined as income after the payment of all:
A) taxes.
B) interest.
C) loans.
D) social insurance contributions.

Accepted Answer

Disposable personal income is the amount of money that an individual has available to spend or save after taxes have been paid. It does not include interest payments, loan payments or social insurance contributions.

Question 4

Investment goods as measured in the GDP are purchased by:
A) business firms alone.
B) households alone.
C) business firms and households.
D) business firms, households, and governments.

Accepted Answer

The answer of Investment goods as measured in the GDP...

Question 5

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when:
A) real interest rates are high.
B) real interest rates are low.
C) average labor productivity is growing rapidly.
D) capital's share of income is growing rapidly.

Accepted Answer

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, real wage growth is primarily driven by changes in average labor productivity. Therefore, when average labor productivity is growing rapidly, workers should experience high rates of real wage growth. Real interest rates and capital's share of income are not the primary drivers of real wage growth in this theory.

Question 6

In a Cobb-Douglas production function the marginal product of labor will increase if:
A) the quantity of labor increases.
B) the quantity of capital increases.
C) capital's share of output increases.
D) average labor productivity decreases.

Accepted Answer

In a Cobb-Douglas production function, the marginal product of labor increases when the quantity of capital increases because capital and labor are complementary inputs. Increasing the amount of capital available for each worker makes each worker more productive.

Question 7

The marginal propensity to consume is:
A) normally expected to be between zero and one.
B) equal to consumption divided by disposable income.
C) normally assumed to decrease as disposable income increases.
D) normally assumed to increase as disposable income increases.

Accepted Answer

The marginal propensity to consume is the fraction of any additional income that is spent on consumption and is normally expected to be between zero and one. The reason for this is that individuals tend to spend a portion of any increase in income but also tend to save a portion of it. Therefore, the marginal propensity to consume cannot be greater than one, as it is not possible to spend more than the additional income received. It also cannot be zero, as individuals will spend at least some portion of any increase in income.

Question 8

According to Goldin and Katz, the increasing income inequality of recent decades is the result of:
A) increases in the rates of technological advance and educational attainment.
B) decreases in the rates of technological advance and educational attainment.
C) a steady pace of technological advance and a slowdown in educational advance.
D) a decrease in the rate of technological advance and an increase in the rate of educational advance.

Accepted Answer

Goldin and Katz argue that the increasing income inequality is due to a steady pace of technological advancement combined with a slowdown in the rate of educational advancement. This creates a gap where the demand for skilled labor outpaces the supply, leading to higher wages for those with the necessary skills and education, and stagnating wages for those without.

Question 9

The public policy implication of Goldin and Katz's analysis of growing income inequality is that reversing this trend will require that more of society's resources be put into:
A) space exploration.
B) capital expenditures.
C) education.
D) transfer payments.

Accepted Answer

Goldin and Katz's analysis shows that education is a key factor in reducing income inequality. Therefore, putting more resources into education, such as increasing funding for schools, improving curriculum, and providing better access to higher education, could help reduce income inequality in the long-term. Choice A (space exploration) and choice B (capital expenditures) are not directly related to addressing income inequality, while choice D (transfer payments) could help alleviate poverty and provide short-term relief, but may not address the root causes of income inequality.

Question 10

In a Cobb-Douglas production function the marginal product of capital will increase if:
A) the quantity of labor increases.
B) the quantity of capital increases.
C) labor's share of output increases.
D) average capital productivity decreases.

Accepted Answer

In a Cobb-Douglas production function, the marginal product of capital increases when the quantity of labor increases because the production function exhibits diminishing marginal returns to each input while holding the other input constant. Increasing labor, while keeping capital constant, increases the productivity of capital due to the complementarity between labor and capital in production.

Question 11

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.
A) increases; higher
B) increases; lower
C) decreases; higher
D) decreases; lower

Accepted Answer

Skill-biased technological change increases the demand for high-skilled workers as new technologies are often implemented to replace routine manual labor, while tasks requiring more cognitive and analytical skills are left for human workers. This leads to an increase in the wages of high-skilled workers due to the increasing demand for their skills. At the same time, a slowdown in educational advancement reduces the supply of skilled workers, further increasing the wages for high-skilled workers. Hence, the answer is A: increases; higher.

Question 12

The demand for output in a closed economy is the sum of:
A) public saving and private saving.
B) the quantity of capital and labor and production technology.
C) consumption, investment, and government spending.
D) government purchases and transfer payments minus tax receipts.

Accepted Answer

The demand for output in a closed economy is determined by the three components of GDP: consumption, investment, and government spending. Public saving and private saving contribute to the economy's ability to produce output in the long run, but they do not directly determine the demand for output in a given period. The quantity of capital and labor and production technology are the factors of production, which determine the economy's potential output, but they do not directly determine the demand for output. Government purchases and transfer payments minus tax receipts determine the government's budget deficit or surplus, but they do not directly determine the demand for output.

Question 13

Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate.
A) positively; positively
B) positively; negatively
C) negatively; negatively
D) negatively; positively

Accepted Answer

Consumption typically increases as disposable income increases, indicating a positive relationship. Investment, however, tends to decrease as the real interest rate increases because higher rates make borrowing more expensive, indicating a negative relationship.

Question 14

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:
A) 2,500.
B) 2,800.
C) 3,500.
D) 4,200.

Accepted Answer

First, calculate T using the given formula T = 200 + 0.2Y. Substituting Y = 6000 gives T = 200 + 0.2(6000) = 200 + 1200 = 1400. Then, substitute Y = 6000 and T = 1400 into the consumption function C = 500 + 0.5(Y - T) to get C = 500 + 0.5(6000 - 1400) = 500 + 0.5(4600) = 500 + 2300 = 2800.

Question 15

A consumption function shows the relationship between consumption and:
A) income.
B) personal income.
C) disposable income.
D) taxes.

Accepted Answer

The consumption function shows the relationship between consumption and disposable income, which is the income available to an individual after taxes and other deductions have been accounted for.

Question 16

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity is growing rapidly:
A) labor's share of total income will be increasing.
B) labor's share of income will be decreasing.
C) workers will experience high rates of real wage growth.
D) economic profits will be positive.

Accepted Answer

According to the neoclassical theory of distribution, labor's share of total income will be constant in the long run, and real wage growth will match the growth in average labor productivity. Therefore, when average labor productivity is growing rapidly, workers will experience high rates of real wage growth. Option A is incorrect because labor's share of total income is constant in the long run. Option B is incorrect for the same reason, and furthermore, the opposite of what is happening since real wage growth is increasing. Option D is irrelevant to the question because positive economic profits are not tied to labor productivity growth.

Question 17

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: A) decreases by 0.85 units. B) decreases by 0.15 units. C) increases by 0.15 units. D) increases by 0.85 units.

Accepted Answer

From the tax function, we can see that an increase in t₀ will lead to an increase in T, which in turn will lead to a decrease in disposable income (Y - T) available for consumption. Since the consumption function has a positive coefficient for (Y - T), an increase in the tax rate will result in a decrease in consumption. Specifically, from the consumption function, we can see that the coefficient for (Y - T) is 0.85. Therefore, an increase in t₀ by 1 unit will lead to a decrease in consumption by 0.85 units.

Question 18

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K^0.5L^0.5, where K = 100 and L = 100, then C equals: A) 1,000. B) 2,500. C) 3,000. D) 5,000.

Accepted Answer

To find C, we need to substitute Y from the production function into the consumption function: C = 500 + 0.5Y C = 500 + 0.5(50K^0.5L^0.5) C = 500 + 25K^0.5L^0.5 Substituting K = 100 and L = 100, we get: C = 500 + 25(100^0.5100^0.5) C = 500 + 25(100) C = 3,000 Therefore, the answer is C.

Question 19

If the consumption function is given by C = 150 + 0.85(Y - T) and T increases by 1 unit, then savings:
A) decreases by 0.85 units.
B) decreases by 0.15 units.
C) increases by 0.15 units.
D) increases by 0.85 units.

Accepted Answer

In the consumption function, C = 150 + 0.85(Y - T), when T increases by 1 unit, the consumption decreases by 0.85 units [(Y - T) decreases by 1 unit and 0.85 is the marginal propensity to consume].

Therefore, savings are the difference between income and consumption, which would increase as consumption decreases. Hence, savings increase by 0.15 units.

Question 20

In a closed economy, the components of GDP are:
A) consumption, investment, government purchases, and exports.
B) consumption, investment, government purchases, and net exports.
C) consumption, investment, and government purchases.
D) consumption and investment.

Accepted Answer

In a closed economy, there are no international trade transactions (exports or imports), so the components of GDP are consumption, investment, and government purchases.

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

Estimates by Goldin and Katz indicate that the financial returns of a year of college _____ between 1980 and 2005.

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings:

Disposable personal income is defined as income after the payment of all:

Investment goods as measured in the GDP are purchased by:

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when:

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

The marginal propensity to consume is:

According to Goldin and Katz, the increasing income inequality of recent decades is the result of:

The public policy implication of Goldin and Katz's analysis of growing income inequality is that reversing this trend will require that more of society's resources be put into:

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

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.

The demand for output in a closed economy is the sum of:

Consumption depends on disposable income, and investment depends on the real interest rate.

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:

A consumption function shows the relationship between consumption and:

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity is growing rapidly:

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:

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K^0.5L^0.5, where K = 100 and L = 100, then C equals:

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

In a closed economy, the components of GDP are: