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

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when the government lowers taxes on business investment, thus increasing desired investment, but does not change government spending or change any taxes that affect disposable income, then the quantity of investment:

Suppose that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.5(Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. Government spending (G) is 1,000 and taxes (T) is also 1,000. When a technological innovation changes the investment function to I = 3,000 - 100r:

In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving ______ and private saving ______.

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

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings:

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

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: L=,K=,G=,T= Y=A Y=C+I+G C=C(Y-T) I=I(r) Suggest at least two policies that a government could use to increase the equilibrium quantity of investment in the economy, and carefully explain how these policies produce this result.

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 cuts spending, holding other factors constant?

In the classical model with fixed income, a reduction in the government budget deficit will lead to a:

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wage(s) of:

Since 1960, the U.S. ratio of labor income to total income has:

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

In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would:

In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. By doing so:

An increase in the supply of capital will:

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given income. This shift, in a neoclassical economy, will:

The real wage is the return to labor measured in:

The two most important factors of production are:

The neoclassical theory of distribution explains the allocation of:

In a closed economy, the components of GDP are: