Question 1

What is the difference between gross investment and net investment?

Accepted Answer

A) Net investment = gross investment minus taxes 
B) Net investment = gross investment minus net factor payments 
C) Net investment = gross investment minus inventory accumulation 
D) Net investment = gross investment minus depreciation 
A) Net investment = gross investment minus taxes 
B) Net investment = gross investment minus net factor payments 
C) Net investment = gross investment minus inventory accumulation 
D) Net investment = gross investment minus depreciation D

Question 2

An invention that raises the future marginal product of capital (in a closed economy)would cause an increase in desired investment,which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________.

Accepted Answer

A) right; increase 
B) right; decrease 
C) left; increase 
D) left; decrease 
A) right; increase 
B) right; decrease 
C) left; increase 
D) left; decrease A

Question 3

Your firm has capital stock of $10 million and a depreciation rate of 15%.Gross investment is $3 million.How much is net investment?

Accepted Answer

A) $1.5 million 
B) $2.0 million 
C) $2.5 million 
D) $3.5 million 
A) $1.5 million 
B) $2.0 million 
C) $2.5 million 
D) $3.5 million A

Question 4

Calculate the tax-adjusted user cost of capital of a machine that costs $10,000 and depreciates at a rate of 10%,when the real interest rate is 3% and the tax rate on revenue is 5%.

Accepted Answer

A) $1238 
B) $1300 
C) $1368 
D) $1800 
A) $1238 
B) $1300 
C) $1368 
D) $1800

Question 5

The yield curve generally slopes upward because

Accepted Answer

A) longer maturity bonds typically pay higher interest rates than shorter maturity bonds. 
B) longer maturity bonds typically pay lower interest rates than shorter maturity bonds. 
C) shorter maturity bonds have more default risk. 
D) longer maturity bonds are not taxable. 
A) longer maturity bonds typically pay higher interest rates than shorter maturity bonds. 
B) longer maturity bonds typically pay lower interest rates than shorter maturity bonds. 
C) shorter maturity bonds have more default risk. 
D) longer maturity bonds are not taxable.

Question 6

How would the expected real after-tax rate of return be affected by each of the following events?
(1)the tax rate on interest income increases
(2)expected inflation declines

Accepted Answer

The expected real after-tax rate of retu

Question 7

The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut

Accepted Answer

A) causes inflation. 
B) causes a current account deficit. 
C) raises interest rates. 
D) doesn't affect consumption. 
A) causes inflation. 
B) causes a current account deficit. 
C) raises interest rates. 
D) doesn't affect consumption.

Question 8

Rachel earns nothing during her learning period,1100 during her working period,and nothing during her retirement period.She has initial assets of 300.The real interest rate is zero.Rachel is not allowed to borrow by the banks.Whenever possible,Rachel wants to smooth consumption between periods.How much will she save during her working period?

Accepted Answer

A) 400 
B) 550 
C) 700 
D) 950 
A) 400 
B) 550 
C) 700 
D) 950

Question 9

Sally will earn $30,000 this year and $40,000 next year.The real interest rate is 20% between this year and next year; she can borrow or lend at this rate.She has no wealth at the start of this year and plans to finish next year having consumed everything she possibly can.She would like to consume the same amount this year as next year.The inflation rate is 0%.
(a)How much should Sally save this year? How much will Sally consume in each of the two years?
(c)How would your answers change if the real interest rate was 40%?

Accepted Answer

In general,S = Y(1)- C(1).So in year 2,s

Question 10

Suppose you divide your life into two periods: working age and retirement age.When you work,you earn labor income Y; when retired,you earn no labor income,but must live off your savings and the interest it earns.You save the amount S while working,earning interest at rate r,so you have (1 + r)S to live on when retired.Because you don't need to consume as much when retired,you want to set consumption when working twice as high as consumption when retired.
(a)Suppose you earn $1 million over your working life,and the real interest rate for retirement saving is 50%.How much will you save and how much will you consume in each part of your life?
(b)Suppose your current income went up to $2 million when working.Now what will you save and how much will you consume each period?
(c)Suppose a social security system will pay you 25% of your working income when you are retired.Now (with Y = $1 million,as in part (a)how much will you save and how much will you consume each period?
(d)Suppose the interest rate rises (starting from the situation in part (a).Will you save more or less?

Accepted Answer

(a)c_W = Y - S,c_R = (1 + r)S; c_W = 2c_R.So Y -

Question 11

Three factors that cause interest rates among different financial instruments to vary are

Accepted Answer

A) default risk, expected inflation, and taxability. 
B) default risk, current inflation, and taxability. 
C) default risk, maturity, and taxability. 
D) default risk, expected inflation, and maturity. 
A) default risk, expected inflation, and taxability. 
B) default risk, current inflation, and taxability. 
C) default risk, maturity, and taxability. 
D) default risk, expected inflation, and maturity.

Question 12

Onerous regulations on businesses that take effect next year (in a closed economy)reduce businesses' expected future marginal product of capital.As a result,the real interest rate ________ and saving ________.

Accepted Answer

A) falls; declines 
B) falls; increases 
C) rises; increases 
D) rises; declines 
A) falls; declines 
B) falls; increases 
C) rises; increases 
D) rises; declines

Question 13

If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a ________ in consumption and a ________ in saving,for someone who's a lender.

Accepted Answer

A) fall; fall 
B) fall; rise 
C) rise; rise 
D) rise; fall 
A) fall; fall 
B) fall; rise 
C) rise; rise 
D) rise; fall

Question 14

The nominal interest rate is 10%,the expected inflation rate is 5%,and the combined state-federal tax rate is 35%.The expected real after-tax interest rate is

Accepted Answer

A) 1)50%. 
B) 3)25%. 
C) 5)00%. 
D) 6)50%. 
A) 1)50%. 
B) 3)25%. 
C) 5)00%. 
D) 6)50%.

Question 15

Which of the factors listed below might cause the Ricardian equivalence proposition to be violated?

Accepted Answer

A) There may be international capital inflows and outflows. 
B) Consumers may not understand that an increase in government borrowing today is likely to lead to higher future taxes. 
C) There may be constraints on the level of government spending. 
D) There may be constraints on the level of government taxation. 
A) There may be international capital inflows and outflows. 
B) Consumers may not understand that an increase in government borrowing today is likely to lead to higher future taxes. 
C) There may be constraints on the level of government spending. 
D) There may be constraints on the level of government taxation.

Question 16

Use a saving-investment diagram to explain what happens to saving,investment,and the real interest rate in each of the following scenarios in a closed economy.
(a)Current output rises due to a temporary productivity increase.
(b)The tax code changes so that business firms face higher tax rates on their revenue (offset by other lump-sum tax changes so there's no overall change in tax revenue).
(c)The government increases spending temporarily for a one-year project to turn mercury into gold.
(d)The average educational level rises,inducing an increase in the future marginal productivity of capital.

Accepted Answer

(a)The rise in output raises desired sav

Question 17

When a person receives an increase in wealth,what is likely to happen to consumption and saving?

Accepted Answer

A) Consumption increases and saving increases. 
B) Consumption increases and saving decreases. 
C) Consumption decreases and saving increases. 
D) Consumption decreases and saving decreases. 
A) Consumption increases and saving increases. 
B) Consumption increases and saving decreases. 
C) Consumption decreases and saving increases. 
D) Consumption decreases and saving decreases.

Question 18

If the stock market value of a firm is $10 million and the firm owns $15 million of capital,then Tobin's q equals

Accepted Answer

A) 2/3. 
B) 1) 
C) 3/2. 
D) 4) 
A) 2/3. 
B) 1) 
C) 3/2. 
D) 4)

Question 19

If Claudette gets a permanent increase in her income of $1000 per year,she saves an extra $200 this year and consumes an extra $800 this year.If the increase in income had been temporary instead of permanent,she would have saved ________ of the extra income.

Accepted Answer

A) More than $200 
B) Less than $200 
C) Exactly $200 
D) None 
A) More than $200 
B) Less than $200 
C) Exactly $200 
D) None

Question 20

The relationship between stock prices and firms' investments in physical capital is captured by what theory?

Accepted Answer

A) User-cost-of-capital theory 
B) q theory 
C) Yield-curve theory 
D) Keynesian theory 
A) User-cost-of-capital theory 
B) q theory 
C) Yield-curve theory 
D) Keynesian theory

What is the difference between gross investment and net investment?

An invention that raises the future marginal product of capital (in a closed economy)would cause an increase in desired investment,which would cause the investment curve to shift to the and would cause the real interest rate to .

Your firm has capital stock of $10 million and a depreciation rate of 15%.Gross investment is $3 million.How much is net investment?

Calculate the tax-adjusted user cost of capital of a machine that costs $10,000 and depreciates at a rate of 10%,when the real interest rate is 3% and the tax rate on revenue is 5%.

The yield curve generally slopes upward because

How would the expected real after-tax rate of return be affected by each of the following events? (1)the tax rate on interest income increases (2)expected inflation declines

The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut

Three factors that cause interest rates among different financial instruments to vary are

Onerous regulations on businesses that take effect next year (in a closed economy)reduce businesses' expected future marginal product of capital.As a result,the real interest rate and saving .

If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a in consumption and a in saving,for someone who's a lender.

The nominal interest rate is 10%,the expected inflation rate is 5%,and the combined state-federal tax rate is 35%.The expected real after-tax interest rate is

Which of the factors listed below might cause the Ricardian equivalence proposition to be violated?

When a person receives an increase in wealth,what is likely to happen to consumption and saving?

If the stock market value of a firm is $10 million and the firm owns $15 million of capital,then Tobin's q equals

If Claudette gets a permanent increase in her income of $1000 per year,she saves an extra $200 this year and consumes an extra $800 this year.If the increase in income had been temporary instead of permanent,she would have saved ________ of the extra income.

The relationship between stock prices and firms' investments in physical capital is captured by what theory?

Introduction to Macroeconomics

The Measurement and Structure of the National Economy

Productivity, output, and Employment

Saving and Investment in the Open Economy

Long-Run Economic Growth

The Asset Market, money, and Prices

Business Cycles

The Is-Lmad-As Model

Classical Business Cycle Analysis

Keynesianism: the Macroeconomics of Wage and Price Rigidity

Unemployment and Inflation

Exchange Rates, business Cycles, and Macroeconomic Policy in the Open Economy

Monetary Policy and the Federal Reserve System

Government Spending and Its Financing

Filters

Exam 4: Consumption, saving, and Investment

What is the difference between gross investment and net investment?

An invention that raises the future marginal product of capital (in a closed economy)would cause an increase in desired investment,which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________.

Your firm has capital stock of $10 million and a depreciation rate of 15%.Gross investment is $3 million.How much is net investment?

Calculate the tax-adjusted user cost of capital of a machine that costs $10,000 and depreciates at a rate of 10%,when the real interest rate is 3% and the tax rate on revenue is 5%.

The yield curve generally slopes upward because

How would the expected real after-tax rate of return be affected by each of the following events? (1)the tax rate on interest income increases (2)expected inflation declines

The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut

Three factors that cause interest rates among different financial instruments to vary are

Onerous regulations on businesses that take effect next year (in a closed economy)reduce businesses' expected future marginal product of capital.As a result,the real interest rate ________ and saving ________.

If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a ________ in consumption and a ________ in saving,for someone who's a lender.

The nominal interest rate is 10%,the expected inflation rate is 5%,and the combined state-federal tax rate is 35%.The expected real after-tax interest rate is

Which of the factors listed below might cause the Ricardian equivalence proposition to be violated?

When a person receives an increase in wealth,what is likely to happen to consumption and saving?

If the stock market value of a firm is $10 million and the firm owns $15 million of capital,then Tobin's q equals

If Claudette gets a permanent increase in her income of $1000 per year,she saves an extra $200 this year and consumes an extra $800 this year.If the increase in income had been temporary instead of permanent,she would have saved ________ of the extra income.

The relationship between stock prices and firms' investments in physical capital is captured by what theory?

Introduction to Macroeconomics

The Measurement and Structure of the National Economy

Productivity, output, and Employment

Saving and Investment in the Open Economy

Long-Run Economic Growth

The Asset Market, money, and Prices

Business Cycles

The Is-Lmad-As Model

Classical Business Cycle Analysis

Keynesianism: the Macroeconomics of Wage and Price Rigidity

Unemployment and Inflation

Exchange Rates, business Cycles, and Macroeconomic Policy in the Open Economy

Monetary Policy and the Federal Reserve System

Government Spending and Its Financing

Filters

An invention that raises the future marginal product of capital (in a closed economy)would cause an increase in desired investment,which would cause the investment curve to shift to the and would cause the real interest rate to .

Onerous regulations on businesses that take effect next year (in a closed economy)reduce businesses' expected future marginal product of capital.As a result,the real interest rate and saving .

If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a in consumption and a in saving,for someone who's a lender.