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

According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their:

Assume that a competitive economy can be described by a constant returns to scale (Cobb-Douglas) production function and all factors of production are fully employed. Holding other factors constant, including the quantity of labor and technology, carefully explain how a one-time, 50-percent decrease in the quantity of capital (perhaps the result of war damage) will change each of the following: a. the level of output produced; b. the real wage of labor; c. the real rental price of capital; d. capital's share of total income.

The supply of loanable funds is equivalent to:

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 government's budget deficit by increasing (lump-sum) taxes on household income. Be sure to label: i. the axes ii. the curves iii. the inifial equilibrium values iv. the direction curves shiff v. the terminal equilibriom valnes. b. State in words what happens to: i. the real interest rate ii. national saving iii. investment iv. consumption v. output.

Assume that GDP (Y) is 5,000. Consumption (C). is given by the equation C = 1,200 + 0.3(Y - T) - 50r, where r is the real interest rate. Investment (I) is given by the equation I = 1,500 - 50r. Taxes (T) are 1,000 and government spending (G) is 1,500. a. What are the equilibrium values of $C , l$ , and $r$ ? b. What are the values of private saving, public saving, and national saving? c. Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to $I = 2,000 - 50 r$ . What are the new equilibrium values of $C$ , $I$ , and $r$ ? d. What are the new values of private saving, public saving, and national saving?

Use the following to answer questions : Exhibit: Saving, Investment, and the Interest Rate 2 -(Exhibit: Saving, Investment, and the Interest Rate 2) 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 there is a technological innovation that increases the demand for investment goods?

The neoclassical theory of distribution:

The home that would have the highest mortgage payment on a 30-year fixed-rate mortgage would be a home with a mortgage of:

In the classical model, what adjusts to eliminate any unemployment of labor in the economy?

Suppose people in an economy reduce their saving. What will be the effect on real interest rate and investment?

According to the model developed in Chapter 3, when government spending increases but taxes are not raised, interest rates:

Skill-biased technological change ______ the demand for high-skilled workers, while the slowdown in the pace of educational advancement reduces the supply of skilled workers, resulting in relatively _____ wages for skilled workers.

Total investment in the United States averages about ______ percent of GDP.

If bread is produced by using a constant returns to scale production function, then if the:

Assume that a firm wants to build a factory that will cost $5 million. It believes that it can get a return of $600,000 in one year and then can sell the used factory for its original cost. The rate of return on this investment would be:

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 raises taxes, holding other factors constant?

The demand for loanable funds is equivalent to:

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

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

The public policy implication of Goldin and Katz's analysis of growing income inequality is that reversing this trend will require that more of society's resources be put into: