Question 1

Explain the difference between "profitability" and "cash flow".

Accepted Answer

Some firms are borrowing constrained. Th

Question 2

Suppose there is an increase in cash flow. This suggests that:

Accepted Answer

A)  the real interest rate has increased. 
B)  the rate of depreciation has increased. 
C)  current profits have increased. 
D)  firms have decreased their expectations of future profits. 
E)  All of the above. 
A)  the real interest rate has increased. 
B)  the rate of depreciation has increased. 
C)  current profits have increased. 
D)  firms have decreased their expectations of future profits. 
E)  All of the above.

Question 3

Which of the following will cause an increase in current consumption?

Accepted Answer

A)  An increase in financial wealth. 
B)  An increase in current disposable income. 
C)  An increase in human wealth. 
D)  All of the above. 
E)  Both A and B. 
A)  An increase in financial wealth. 
B)  An increase in current disposable income. 
C)  An increase in human wealth. 
D)  All of the above. 
E)  Both A and B.

Question 4

Explain how a change in expected future output could change current output.

Accepted Answer

There are two channels here. An increase

Question 5

Which of the following describes the "depreciation rate"?

Accepted Answer

A)  The difference between current and expected income. 
B)  How much usefulness a machine loses from year to year. 
C)  The interest rate that should be used in present discounted value calculations. 
D)  The difference between current and expected profits. 
E)  The rate at which consumers deplete their total wealth in retirement. 
A)  The difference between current and expected income. 
B)  How much usefulness a machine loses from year to year. 
C)  The interest rate that should be used in present discounted value calculations. 
D)  The difference between current and expected profits. 
E)  The rate at which consumers deplete their total wealth in retirement.

Question 6

Human wealth is a function (i.e., affected by changes in) of which of the following variables?

Accepted Answer

A)  Current interest rates. 
B)  Future expected income. 
C)  Future expected taxes. 
D)  All of the above. 
E)  None of the above. 
A)  Current interest rates. 
B)  Future expected income. 
C)  Future expected taxes. 
D)  All of the above. 
E)  None of the above.

Question 7

The user cost of capital is represented by which of the following variables?

Accepted Answer

A)  IIt/(rt + 6). 
B)  1/(rt + 6). 
C)  rt. 
D)  rt + 6. 
E)  IIt. 
A)  IIt/(rt + 6). 
B)  1/(rt + 6). 
C)  rt. 
D)  rt + 6. 
E)  IIt.

Question 8

The data for Australia show that investment and profits:

Accepted Answer

A)  have a clear positive relationship. 
B)  are positively related during recessions, and negatively related during expansions. 
C)  are positively related during expansions, and negatively related during recessions. 
D)  have a strong negative relationship. 
E)  move independently. 
A)  have a clear positive relationship. 
B)  are positively related during recessions, and negatively related during expansions. 
C)  are positively related during expansions, and negatively related during recessions. 
D)  have a strong negative relationship. 
E)  move independently.

Question 9

Which of the following will occur when the capital stock increases?

Accepted Answer

A)  There will be no change in profit per unit of capital. 
B)  Profit per unit of capital will decrease. 
C)  Profit per unit of capital will increase. 
D)  Profit per unit of capital initially increases followed by decreases. 
E)  There will be an ambiguous effect on profit per unit of capital. 
A)  There will be no change in profit per unit of capital. 
B)  Profit per unit of capital will decrease. 
C)  Profit per unit of capital will increase. 
D)  Profit per unit of capital initially increases followed by decreases. 
E)  There will be an ambiguous effect on profit per unit of capital.

Question 10

A decrease in the rate of depreciation will cause the discounted present value of expected profits to:

Accepted Answer

A)  decrease. 
B)  increase. 
C)  remain unchanged if the real interest rate decreases by the same amount. 
D)  All of the above. 
E)  None of the above. 
A)  decrease. 
B)  increase. 
C)  remain unchanged if the real interest rate decreases by the same amount. 
D)  All of the above. 
E)  None of the above.

Question 11

The "life cycle" and "permanent income" theories of consumption share which of the following features?

Accepted Answer

A)  Consumption remains stable on a permanent basis. 
B)  Consumption spending depends on income, rather than wealth. 
C)  Consumption spending should fluctuate widely from year to year. 
D)  Consumers look ahead to the future in making current spending decisions. 
E)  Consumption decisions are based on how well the stock market performs. 
A)  Consumption remains stable on a permanent basis. 
B)  Consumption spending depends on income, rather than wealth. 
C)  Consumption spending should fluctuate widely from year to year. 
D)  Consumers look ahead to the future in making current spending decisions. 
E)  Consumption decisions are based on how well the stock market performs.

Question 12

Assume the following: (1) the real cost of a unit of capital is one; (2) the unit of capital is expected to increase a firm's real profit by $10,000 each year, and depreciate by 10% each year; and (3) the real interest rate is 2%. What is the "user cost" or "rental cost" of this unit of capital?

Accepted Answer

A)  0.09. 
B)  0.03. 
C)  0.12. 
D)  0.15. 
E)  0.18. 
A)  0.09. 
B)  0.03. 
C)  0.12. 
D)  0.15. 
E)  0.18.

Question 13

Which of the following is a reason that consumption depends on current income, and not just on total wealth?

Accepted Answer

A)  The anticipation of future financial distress makes some people reluctant to borrow. 
B)  Low income people may prefer to postpone some consumption until later years, when their incomes are higher. 
C)  Banks will not always lend money to those who want to consume more than their income. 
D)  All of the above. 
E)  None of the above. 
A)  The anticipation of future financial distress makes some people reluctant to borrow. 
B)  Low income people may prefer to postpone some consumption until later years, when their incomes are higher. 
C)  Banks will not always lend money to those who want to consume more than their income. 
D)  All of the above. 
E)  None of the above.

Question 14

Suppose an individual experiences a $25,000 decrease in real income and the individual believes this decrease in income is permanent. Economic theory suggests that this individual's current consumption will:

Accepted Answer

A)  decrease, remain unchanged, or increase, depending on the value of the real interest rate. 
B)  decrease by more than $25,000. 
C)  decrease at most by $25,000. 
D)  decrease or remain unchanged, depending on the value of the real interest rate. 
E)  decrease by less than $25,000. 
A)  decrease, remain unchanged, or increase, depending on the value of the real interest rate. 
B)  decrease by more than $25,000. 
C)  decrease at most by $25,000. 
D)  decrease or remain unchanged, depending on the value of the real interest rate. 
E)  decrease by less than $25,000.

Question 15

Which of the following events would likely cause the largest decrease in current consumption?

Accepted Answer

A)  A one- time decrease in income (e.g. a bonus) of $4000. 
B)  A permanent decrease in annual salary of $2000. 
C)  A one- time tax increase of $4000. 
D)  Both A and C. 
E)  Both B and C. 
A)  A one- time decrease in income (e.g. a bonus) of $4000. 
B)  A permanent decrease in annual salary of $2000. 
C)  A one- time tax increase of $4000. 
D)  Both A and C. 
E)  Both B and C.

Question 16

Explain each of the determinants of the present value of expected profits from buying a new machine.

Accepted Answer

The current and expected real

Question 17

An increase in which of the following variables will cause an increase in the user cost of capital?

Accepted Answer

A)  t 6. 
B)  Yt. 
C)  Kt. 
D)  IIt. 
E)  II e . 
A)  t 6. 
B)  Yt. 
C)  Kt. 
D)  IIt. 
E)  II e .

Question 18

The data shows that total profit in the Australian economy:

Accepted Answer

A)  tends to increase in even years, and decrease in odd years, although no one can explain why. 
B)  tends to decrease in recessions, increase in expansions. 
C)  is not influenced by the business cycle. 
D)  has decreased steadily over time. 
E)  tends to increase in recessions, decrease in expansions. 
A)  tends to increase in even years, and decrease in odd years, although no one can explain why. 
B)  tends to decrease in recessions, increase in expansions. 
C)  is not influenced by the business cycle. 
D)  has decreased steadily over time. 
E)  tends to increase in recessions, decrease in expansions.

Question 19

Assume that firms experience an increase in sales. We would expect that this increase in sales will cause:

Accepted Answer

A)  ambiguous effects on profit per unit of capital. 
B)  initial increases followed by decreases in profit per unit of capital. 
C)  an increase in profit per unit of capital. 
D)  no change in profit per unit of capital. 
E)  a decrease in profit per unit of capital. 
A)  ambiguous effects on profit per unit of capital. 
B)  initial increases followed by decreases in profit per unit of capital. 
C)  an increase in profit per unit of capital. 
D)  no change in profit per unit of capital. 
E)  a decrease in profit per unit of capital.

Exam 16: Expectations, Consumption and Investment

Explain the difference between "profitability" and "cash flow".

Suppose there is an increase in cash flow. This suggests that:

Which of the following will cause an increase in current consumption?

Explain how a change in expected future output could change current output.

Which of the following describes the "depreciation rate"?

Human wealth is a function (i.e., affected by changes in) of which of the following variables?

The user cost of capital is represented by which of the following variables?

The data for Australia show that investment and profits:

Which of the following will occur when the capital stock increases?

A decrease in the rate of depreciation will cause the discounted present value of expected profits to:

The "life cycle" and "permanent income" theories of consumption share which of the following features?

Assume the following: (1) the real cost of a unit of capital is one; (2) the unit of capital is expected to increase a firm's real profit by $10,000 each year, and depreciate by 10% each year; and (3) the real interest rate is 2%. What is the "user cost" or "rental cost" of this unit of capital?

Which of the following is a reason that consumption depends on current income, and not just on total wealth?

Suppose an individual experiences a $25,000 decrease in real income and the individual believes this decrease in income is permanent. Economic theory suggests that this individual's current consumption will:

Which of the following events would likely cause the largest decrease in current consumption?

Explain each of the determinants of the present value of expected profits from buying a new machine.

An increase in which of the following variables will cause an increase in the user cost of capital?

The data shows that total profit in the Australian economy:

Assume that firms experience an increase in sales. We would expect that this increase in sales will cause:

A Tour of the World

A Tour of the Book

The Goods Market

Financial Markets

Goods and Financial Markets: the Islm Model

The Labour Market

Putting All Markets Together: the Asad Model

The Phillips Curve, the Natural Rate of Unemployment and Inflation

The Crisis

The Facts of Growth

Saving, Capital Accumulation and Output

Technological Progress and Growth

Technological Progress: the Short, the Medium and the Long Run

Expectations: the Basic Tools

Financial Markets and Expectations

Expectations, Output and Policy

Openness in Goods and Financial Markets

The Goods Market

Output, the Interest Rate and the Exchange Rate

Exchange Rate Regimes

Should Policy-Makers Be Restrained

Fiscal Policy: a Summing up

Monetary Policy: a Summing up

Epilogue: the Story of Macroeconomics

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