Question 1

If consumers foresee future taxes completely, a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause

Accepted Answer

A)  an increase in the real interest rate and a decrease in desired investment. 
B)  a decrease in the real interest rate and an increase in desired investment. 
C)  a decrease in the real interest rate and an uncertain effect on desired investment. 
D)  a change in neither the real interest rate nor desired investment. 
A)  an increase in the real interest rate and a decrease in desired investment. 
B)  a decrease in the real interest rate and an increase in desired investment. 
C)  a decrease in the real interest rate and an uncertain effect on desired investment. 
D)  a change in neither the real interest rate nor desired investment.

Question 2

Your firm has capital stock of $15 million and a depreciation rate of 10%. Gross investment is $2.5 million. How much is net investment?

Accepted Answer

A)  $13.5 million 
B)  $2.5 million 
C)  $1.5 million 
D)  $1.0 million 
A)  $13.5 million 
B)  $2.5 million 
C)  $1.5 million 
D)  $1.0 million

Question 3

You have just purchased a home that cost $250 thousand. The nominal mortgage interest rate is 8% per annum, mortgage interest payments are tax deductible, and you are in a 30% tax bracket. The expected inflation rate is 4%.Maintenance and other expenses are 8% of the initial value of the house. What is the real user cost of your house?

Accepted Answer

A)  $20 thousand 
B)  $24 thousand 
C)  $27 thousand 
D)  $30 thousand 
A)  $20 thousand 
B)  $24 thousand 
C)  $27 thousand 
D)  $30 thousand

Question 4

In 2001 your firm's capital stock equaled $10 million, and in 2002 it equaled $15 million. The average depreciation rate on your capital stock is 20%. Net investment in 2002 equaled

Accepted Answer

A)  $3 million. 
B)  $4 million. 
C)  $5 million. 
D)  $7 million. 
A)  $3 million. 
B)  $4 million. 
C)  $5 million. 
D)  $7 million.

Question 5

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

Question 6

When firms carry out new investment, the user cost of capital

Accepted Answer

A)  increases as the amount of capital increases. 
B)  decreases as the amount of capital increases. 
C)  first decreases, then increases as the amount of capital increases. 
D)  remains constant as the amount of capital increases. 
A)  increases as the amount of capital increases. 
B)  decreases as the amount of capital increases. 
C)  first decreases, then increases as the amount of capital increases. 
D)  remains constant as the amount of capital increases.

Question 7

When desired national saving equals desired national investment, what market is in equilibrium?

Accepted Answer

A)  the goods market 
B)  the money market 
C)  the foreign exchange market 
D)  the stock market 
A)  the goods market 
B)  the money market 
C)  the foreign exchange market 
D)  the stock market

Question 8

An economy has government purchases of 1000. Desired national saving and desired investment are given by Sd = 200 + 5000r + .10Y - .20G
Id = 1000 - 4000r
When the full-employment level of output equals 5000, then the real interest rate that clears the goods market will be

Accepted Answer

A)  1.11%. 
B)  5.56%. 
C)  16.67%. 
D)  21.11%. 
A)  1.11%. 
B)  5.56%. 
C)  16.67%. 
D)  21.11%.

Question 9

If the government cuts taxes today, issuing debt today and repaying the debt plus interest next year, a rational taxpayer will

Accepted Answer

A)  spend the full amount of the tax cut today and reduce consumption next year. 
B)  increase consumption today, before taxes go up next year. 
C)  increase saving today, leaving consumption unchanged. 
D)  leave a smaller gross bequest to her or his heirs. 
A)  spend the full amount of the tax cut today and reduce consumption next year. 
B)  increase consumption today, before taxes go up next year. 
C)  increase saving today, leaving consumption unchanged. 
D)  leave a smaller gross bequest to her or his heirs.

Question 10

The "q theory of investment," or "Tobin's q" states that

Accepted Answer

A)  a rise in the stock market would lead firms to increase their rate of capital investment. 
B)  a fall in the stock market would lead firms to increase their rate of capital investment. 
C)  a rise in the stock market would lead firms to decrease their rate of capital investment. 
D)  there is no relationship between the stock price changes and the capital investment. 
A)  a rise in the stock market would lead firms to increase their rate of capital investment. 
B)  a fall in the stock market would lead firms to increase their rate of capital investment. 
C)  a rise in the stock market would lead firms to decrease their rate of capital investment. 
D)  there is no relationship between the stock price changes and the capital investment.

Question 11

The effect of changes in wealth on consumers' spending is

Accepted Answer

A)  significantly higher if the change in wealth arises from the housing rather than that arises from stock market. 
B)  significantly lower if the change in wealth arises from the housing rather than that arises from stock market. 
C)  significantly higher if the change in wealth arises from saving rather than that arises from the housing. 
D)  not dependent on the type of wealth. 
A)  significantly higher if the change in wealth arises from the housing rather than that arises from stock market. 
B)  significantly lower if the change in wealth arises from the housing rather than that arises from stock market. 
C)  significantly higher if the change in wealth arises from saving rather than that arises from the housing. 
D)  not dependent on the type of wealth.

Question 12

You have just purchased a new VCR to show videos to your customers. The VCR cost $500, and you depreciate the machine at a rate of 25% each year. You can borrow money from the bank at 10%, or receive 6% for depositing money at the bank. The expected inflation rate in the coming year is 5%. You borrowed money from the bank to purchase the VCR. The firm's user cost of capital for the first year is

Accepted Answer

A)  $130. 
B)  $150. 
C)  $155. 
D)  $175. 
A)  $130. 
B)  $150. 
C)  $155. 
D)  $175.

Question 13

The effective tax rate is

Accepted Answer

A)  a single measure of tax owed by a firm. 
B)  a single measure of the tax credit on investment. 
C)  a single measure of how much tax a firm pays. 
D)  a single measure of the tax burden on capital. 
A)  a single measure of tax owed by a firm. 
B)  a single measure of the tax credit on investment. 
C)  a single measure of how much tax a firm pays. 
D)  a single measure of the tax burden on capital.

Question 14

Suppose the stock price for a firm in Manitoba is $10 per share. The firm has 5 machines and 1,000 shares outstanding. Suppose the price of a new machine is $1,500.
a. What is Tobin's q for this firm?
b. Should this firm make new investment (buy new machine)? Why?
c. Assume the firm's stock price falls down to $6 per share. Should the firm buy new machine?
d. Assume the price of a new machine rises to $1,800. Using the original information for the other variables, should the firm make new investment?

Accepted Answer

a. The Tobin's q is equal to the ratio o

Question 15

A temporary increase in government purchases, when total output held constant, would

Accepted Answer

A)  reduce desired consumption but would increase desired national saving. 
B)  increase desired consumption but would reduce desired national saving. 
C)  increase both desired consumption and desired national saving. 
D)  reduce both desired consumption and desired national saving. 
A)  reduce desired consumption but would increase desired national saving. 
B)  increase desired consumption but would reduce desired national saving. 
C)  increase both desired consumption and desired national saving. 
D)  reduce both desired consumption and desired national saving.

Question 16

A firm has current and future marginal productivity of capital given by MPK = 10,000 - 2K + N, and marginal productivity of labour given by MPN = 50 - 2N + K. The price of capital is $5,000, the real interest rate is 10%, and capital depreciates at a 15% rate. The real wage is $15.
a. Calculate the user cost of capital.
b. Find the firm's optimal amount of employment and the size of the capital stock.

Accepted Answer

a. uc = (r + d)pK = .25 × $5000 = $1250.

Question 17

Use a saving-investment diagram to explain what happens to saving, investment, and the real interest rate in each of the following scenarios.
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 is 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 18

A temporary decrease in government purchases would cause

Accepted Answer

A)  an increase in the real interest rate and a decrease in desired investment. 
B)  a decrease in the real interest rate and an increase in desired investment. 
C)  a decrease in the real interest rate and an uncertain effect on desired investment. 
D)  an uncertain effect on the real interest rate and an increase in the level of desired investment. 
A)  an increase in the real interest rate and a decrease in desired investment. 
B)  a decrease in the real interest rate and an increase in desired investment. 
C)  a decrease in the real interest rate and an uncertain effect on desired investment. 
D)  an uncertain effect on the real interest rate and an increase in the level of desired investment.

Question 19

The Canadian consumption function is given by C = 50 + 0.75 Y. This implies that

Accepted Answer

A)  Canadians spend 75 percent of their income on average. 
B)  each Canadian spends 75 percent of her/his income. 
C)  Canadians on average spend 75 cents out of each additional dollar earned. 
D)  Canadian spend 50 dollars of their income on average. 
A)  Canadians spend 75 percent of their income on average. 
B)  each Canadian spends 75 percent of her/his income. 
C)  Canadians on average spend 75 cents out of each additional dollar earned. 
D)  Canadian spend 50 dollars of their income on average.

Question 20

The Ricardian equivalence proposition says that

Accepted Answer

A)  a budget deficit caused entirely by a current tax cut has no effect on the economy. 
B)  a budget deficit caused entirely by an increase in government purchases has no effect on the economy. 
C)  any budget deficit generated by the government has no effect on the economy. 
D)  an increase in government spending accompanied by an equivalent increase in taxes has no effect on the economy. 
A)  a budget deficit caused entirely by a current tax cut has no effect on the economy. 
B)  a budget deficit caused entirely by an increase in government purchases has no effect on the economy. 
C)  any budget deficit generated by the government has no effect on the economy. 
D)  an increase in government spending accompanied by an equivalent increase in taxes has no effect on the economy.

If consumers foresee future taxes completely, a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause

Your firm has capital stock of $15 million and a depreciation rate of 10%. Gross investment is $2.5 million. How much is net investment?

In 2001 your firm's capital stock equaled $10 million, and in 2002 it equaled $15 million. The average depreciation rate on your capital stock is 20%. Net investment in 2002 equaled

What is the difference between gross investment and net investment?

When firms carry out new investment, the user cost of capital

When desired national saving equals desired national investment, what market is in equilibrium?

An economy has government purchases of 1000. Desired national saving and desired investment are given by S^d = 200 + 5000r + .10Y - .20G I^d = 1000 - 4000r When the full-employment level of output equals 5000, then the real interest rate that clears the goods market will be

If the government cuts taxes today, issuing debt today and repaying the debt plus interest next year, a rational taxpayer will

The "q theory of investment," or "Tobin's q" states that

The effect of changes in wealth on consumers' spending is

The effective tax rate is

A temporary increase in government purchases, when total output held constant, would

A temporary decrease in government purchases would cause

The Canadian consumption function is given by C = 50 + 0.75 Y. This implies that

The Ricardian equivalence proposition says that

Introduction to Macroeconomics

The Measurement and Structure of the Canadian 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: A General Framework for Macroeconomic Analysis

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

Classical Business Cycle Analysis: Market-Clearing Macroeconomics

Keynesian Business Cycle Analysis: Non-Market-Clearing Macroeconomics

Unemployment and Inflation

Monetary Policy and the Bank of Canada

Government Spending and Its Financing

Filters

Exam 4: Consumption, Saving, and Investment

If consumers foresee future taxes completely, a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause

Your firm has capital stock of $15 million and a depreciation rate of 10%. Gross investment is $2.5 million. How much is net investment?

In 2001 your firm's capital stock equaled $10 million, and in 2002 it equaled $15 million. The average depreciation rate on your capital stock is 20%. Net investment in 2002 equaled

What is the difference between gross investment and net investment?

When firms carry out new investment, the user cost of capital

When desired national saving equals desired national investment, what market is in equilibrium?

An economy has government purchases of 1000. Desired national saving and desired investment are given by Sd = 200 + 5000r + .10Y - .20G Id = 1000 - 4000r When the full-employment level of output equals 5000, then the real interest rate that clears the goods market will be

If the government cuts taxes today, issuing debt today and repaying the debt plus interest next year, a rational taxpayer will

The "q theory of investment," or "Tobin's q" states that

The effect of changes in wealth on consumers' spending is

The effective tax rate is

A temporary increase in government purchases, when total output held constant, would

A temporary decrease in government purchases would cause

The Canadian consumption function is given by C = 50 + 0.75 Y. This implies that

The Ricardian equivalence proposition says that

Introduction to Macroeconomics

The Measurement and Structure of the Canadian 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: A General Framework for Macroeconomic Analysis

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

Classical Business Cycle Analysis: Market-Clearing Macroeconomics

Keynesian Business Cycle Analysis: Non-Market-Clearing Macroeconomics

Unemployment and Inflation

Monetary Policy and the Bank of Canada

Government Spending and Its Financing

Filters

An economy has government purchases of 1000. Desired national saving and desired investment are given by S^d = 200 + 5000r + .10Y - .20G I^d = 1000 - 4000r When the full-employment level of output equals 5000, then the real interest rate that clears the goods market will be