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

A production function is a mathematical relationship between:

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^a L^{(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?​

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:

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?

If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is:

If saving exceeds investment demand and consumption is not a function of the interest rate:

Unlike the real world, the classical model with fixed output assumes that:

In the classical model with fixed income, if the interest rate is too low, then investment is too _____, and the demand for output _____ the supply.

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will:

In the classical model with fixed output, the supply and demand for goods and services are balanced by:

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.​

A consumption function shows the relationship between consumption and:

In the circular flow model, households receive income from the _____ market and save through the _____ market.

When economists speak of "the" interest rate, they mean:

In a classical model with fixed factors of production and flexible prices, the amount of consumption spending depends on _____, the amount of investment spending depends on _____, and the amount of government spending is determined _____.

If output is described by the production function Y = AK^0.2L^0.8, then the production function has:

Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides that it should:

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:

In equilibrium, total investment equals:

If an increase of an equal percentage in all factors of production increases output of the same percentage, then a production function has the property called: