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

In an economy with flexible prices, competitive factor markets and fixed supplies of the factors of production, graphically illustrate the impact of a change in immigration policy in a country that permits a huge influx of foreign workers into the labor market, ceteris paribus. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve's shift; and v. the terminal equilibrium values. Explain in words how the equilibrium values of labor, the real wage, saving, investment, and the real interest rate change.

The demand for the economy's output:

According to Euler's theorem, if competitive firms pay each factor its marginal product and the production function has constant returns to scale, the sum of all factor payments will equal:

Use the following to answer questions : Exhibit: Saving, Investment, and the Interest Rate 1 -(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 increases spending, holding other factors constant?

Consider two competitive economies that have the same quantities of labor (L = 400) and capital (K = 400), and the same technology (A = 100). The economies of the countries are described by the following Cobb-Douglas production functions: North Economy: $Y = A L ^ { 3 } K ^ { 7 }$ South Economy: $Y = A L ^ { 7 } K ^ { .3 }$ a. Which economy has the larger total production? Explain. b. In which economy is the marginal product of labor larger? Explain. c. In which economy is the real wage larger? Expl ain. d. In which economy is labor's share of income larger? Explain.

Price flexibility plays a key role in the classical model by ensuring that the markets reach equilibrium. a. Explain which price adjusts to bring equilibrium in the labor market. Describe how the price adjusts when demand exceeds supply in this market. b. Explain which price adjusts to bring equilibrium in the loanable funds market. Describe how the price adjusts when supply exceeds demand in this market.

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

When there is a fixed supply of loanable funds, an increase in investment demand results in a(n):

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

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:

Assume that the production function is given by Y = AK^0.5L^0.5, where Y is GDP, K is capital stock, and L is labor. The parameter A is equal to 10. Assume also that capital is 100, labor is 400, and both capital and labor are paid for their marginal products. a. What is $Y$ ? b. What is the real wage of labor? c. What is the real rental price of capital (the amount of output paid per unit of capital)?

In the United Kingdom between 1730 and 1920, during wartime, government spending tended to increase:

In the long run, the level of national income in an economy is determined by its:

The equation $\bar { Y } = C ( \bar { Y } - \bar { T } ) + I ( r ) + \bar { G }$ may be solved for the equilibrium level of:

a. Suppose a government moves to reduce a budget deficit. Using the long-run model of the economy developed in Chapter 3, graphically illustrate the impact of reducing a goverment's budget deficit by reducing government purchases. Be sure fo label: i. the axes ii. the curves iii. the inifial equilibrium values iv. the direction curves shiff v. theterminal equilibrium values b. State in words what happens to: i. the real interest rate ii. national saving iii. investment iv.consumption v. output.

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

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

A production function is a technological relationship between:

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 examining the impact of fiscal policy, it is assumed that: