Deck 11: A Real Intertemporal Model with Investment

Question 1

The assumption that current-period consumption demand is negatively related to the real interest rate is justified as long as the

A) income effect dominates the substitution effect.
B) substitution effect dominates the income effect.
C) representative consumer is a borrower.
D) representative consumer is a lender.
E) income effect and substitution effects are equal.

Answer 1

B

Question 2

For the economy as a whole, investment represents a tradeoff between

A) real interest rates and GDP.
B) government spending and issuing debt.
C) present and future consumption.
D) savings and investment.
E) interest rates and taxes.

Answer 2

C

Question 3

The marginal rate of substitution of future leisure for future consumption must be equal to

A) the real interest rate.
B) savings in the current period.
C) one.
D) the future real wage.
E) the relative price of current consumption in terms of future consumption.

Answer 3

D

Question 4

The firm will hire current labour until

A) profits are maximized.
B) total factor productivity is maximized.
C) the marginal product of labour equals total employment.
D) the marginal product of labour equals the wage rate.
E) the marginal product of labour is less than the real interest rate.

Question 5

An increase in the real interest rate

A) reduces savings.
B) shifts the current labour supply curve to the right.
C) shifts the current labour supply curve to the left.
D) reduces the real wage.
E) reduces the labour supply.

Question 6

The slope of the demand for consumption goods is

A) greater than 1.
B) equal to 1.
C) the MPC.
D) the MRS.
E) equal to the wage rate.

Question 7

An increase in lifetime wealth is likely to

A) increase current labour supply and increase current consumption demand.
B) increase current labour supply and decrease current consumption demand.
C) decrease current labour supply and increase current leisure.
D) decrease current labour supply and decrease current consumption demand.
E) decrease current labour supply and decrease current leisure.

Question 8

Any increase in the present value of taxes for the consumer implies

A) an increase in lifetime wealth and an increase in current labour supply.
B) an increase in lifetime wealth and a decrease in current labour supply.
C) a decrease in lifetime wealth and an increase in current labour supply.
D) a decrease in lifetime wealth and a decrease in current labour supply.
E) a decrease in lifetime wealth and a decrease in current consumption demand.

Question 9

Next period's capital is equal to current-period investment

A) plus the amount of current capital left over after depreciation.
B) minus the amount of current capital left over after depreciation.
C) plus the amount of current period depreciation.
D) minus the amount of current period depreciation.
E) plus the amount of current capital left over.

Question 10

An increase in lifetime wealth

A) shifts the current labour supply curve to the left.
B) shifts the current labour supply curve to the right.
C) reduces the real wage.
D) increases labour supply.
E) reduces savings.

Question 11

The assumption that current-period labour supply is positively related to the current-period real wage is justified as long as the

A) income effect dominates the substitution effect in the short run.
B) income effect dominates the substitution effect in the long run.
C) substitution effect dominates the income effect in the short run.
D) substitution effect dominates the income effect in the long run.
E) substitution effect equals the income effect in the long run.

Question 12

A consumer may increase his or her saving by

A) working more hours and consuming more goods in the present period.
B) working more hours and consuming fewer goods in the present period.
C) working fewer hours and consuming more goods in the present period.
D) working fewer hours and consuming fewer goods in the present period.
E) working more hours and paying less taxes in the present period.

Question 13

The condition MRSC,C' = 1 + r describes the representative consumer's

A) investment decision.
B) current consumption-savings decision.
C) current period work-leisure decision.
D) future period work-leisure decision.
E) future consumption-savings decision.

Question 14

The condition MRS?'C' = w' describes the representative consumer's

A) investment decision.
B) current consumption-savings decision.
C) current period work-leisure decision.
D) future period work-leisure decision.
E) future consumption-savings decision.

Question 15

When the real interest rate increases, the demand for current consumption

A) shifts up.
B) remains constant.
C) moves along the demand curve.
D) shifts down.
E) increases for each level of current income.

Question 16

The intertemporal substitution of leisure effect is used to justify the assumption that current labour supply increases when the

A) current real wage increases.
B) current real wage decreases.
C) real interest rate increases.
D) real interest rate decreases.
E) current real wage and real investment rate decreases.

Question 17

The condition MRS?,C = w describes the representative consumer's

A) investment decision.
B) current consumption-savings decision.
C) current period work-leisure decision.
D) future period work- leisure decision.
E) future consumption-savings decision.

Question 18

The representative consumer's current labour supply curve slopes upward under the assumption that

A) there is an indirect relationship between the current real wage and current labour supply.
B) the substitution effect of an increase in the real wage outweighs the income effect.
C) the substitution effect of an increase in the real wage is less than the income effect.
D) the substitution effect of an increase in the current labour supply outweighs the income effect.
E) the substitution effect of an increase in the current labour supply is less than the income effect.

Question 19

A key determinant of investment is

A) the expected rate of future total factor productivity.
B) the level of economic activity.
C) the level of government spending.
D) the potential for exports.
E) the real interest rate.

Question 20

The demand for current consumption, as plotted against current income, shifts to the right due to

A) a increase in current taxes.
B) an increase in future taxes.
C) an increase in current income.
D) a decrease in future income.
E) a decrease in interest rates.

Question 21

An increase in the default premium

A) raises the safe credit market interest rate.
B) lowers the real interest rate and firms invest more.
C) shifts the optimal investment schedule to the left.
D) shifts the optimal investment schedule to the right.
E) will prevent firms from defaulting on their loans.

Question 22

The marginal benefit from investment is

A) the ratio of investment to expected future profits.
B) related to economic activity and the real interest rate.
C) what one unit of investment in the current period adds to the present value of profits.
D) what one unit of investment adds to the current capital stock.
E) what one unit of investment costs when funds are borrowed.

Question 23

If firm-level asymmetric information becomes more severe, then

A) investment demand decreases.
B) investment demand does not change.
C) investment demand increases.
D) there is an unambiguous effect on investment demand.
E) investment demand decreases if the substitution effect dominates, increases if the income effect dominates.

Question 24

When drawn against the real interest rate, the output supply curve unambiguously shifts to the right if either or both of the following occur.

A) an increase in current government spending and an increase in future government spending
B) an increase in current government spending and a decrease in future government spending
C) a decrease in current government spending and an increase in future government spending
D) a decrease in current government spending and a decrease in future government spending
E) a decrease in current government spending and an increase in the real interest rate

Question 25

When drawn against the real interest rate, the output supply curve is upward sloping because labour supply is

A) increasing the real interest rate and labour demand is independent of the real interest rate.
B) decreasing the real interest rate and labour demand is independent of the real interest rate.
C) independent of the real interest rate and labour demand is increasing the real interest rate.
D) independent of the real interest rate and labour demand is decreasing the real interest rate.
E) increasing as the wage rate rises.

Question 26

Investment will be more variable if

A) there is variability in z'' that shifts the investment schedule over time.
B) there is variability in z'' that causes movements along the investment schedule over time.
C) there is variability in r that shifts the investment schedule over time.
D) the real interest rate remains below the return on stocks.
E) stock prices remain sufficiently volatile.

Question 27

An increase in G or G' shifts the output supply curve to the right because

A) lifetime wealth increases, a positive income effect that shifts labour supply to the right.
B) lifetime wealth decreases, a negative income effect that shifts labour supply to the left.
C) lifetime wealth decreases, a negative income effect that shifts labour supply to the right.
D) the increase in the real interest rate shifts output supply.
E) the decrease in the real interest rate shifts output supply.

Question 28

Investment will be more variable if the real interest rate is

A) more variable and future total factor productivity is more variable.
B) more variable and future total factor productivity is less variable.
C) less variable and future total factor productivity is more variable.
D) less variable and future total factor productivity is less variable.
E) constant with total factor productivity.

Question 29

When drawn against the current real wage, the labour demand curve is

A) upward sloping because the marginal product of labour rises with the quantity of labour employed.
B) upward sloping because the marginal product of labour declines with the quantity of labour employed.
C) downward sloping because the marginal product of labour rises with the quantity of labour employed.
D) downward sloping because the marginal product of labour declines with the quantity of labour employed.
E) downward sloping because the marginal product of labour is constant.

Question 30

Investment tends to be more variable over the business cycle than

A) savings.
B) government spending.
C) real interest rates.
D) aggregate output.
E) consumer income.

Question 31

Optimal investment is

A) negatively related with the real interest rate.
B) positively related with the real interest rate.
C) determined by current stock prices.
D) unrelated to the real interest rate.
E) positively related with the depreciation rate.

Question 32

When drawn against the real interest rate, the optimal investment schedule shifts to the right if the

A) current capital stock K increases.
B) current capital stock K decreases.
C) future capital stock K' increases.
D) future capital stock K' increases.
E) future total factor productivity increases.

Question 33

An important feature of the financial market crisis was

A) decreased interest rate spread on risky assets versus safe assets.
B) increased investment by firms.
C) an increase in the safe credit market interest rate, r.
D) increased financial market uncertainty.
E) a lower opportunity cost of investment.

Question 34

The marginal cost of investment for the firm is equal to

A) 1.
B) -1.
C) MP'K.
D) - MP'K.
E) 1/MP'K.

Question 35

A firm that is a lender finances its lending

A) with a default premium.
B) with the spread between borrowing and lending rates.
C) with retained earnings.
D) through credit market imperfections.
E) in the bond market.

Question 36

The marginal benefit from investment comes from

A) increased production and more undepreciated capital in the future period.
B) only increased production in the future period.
C) only increased undepreciated capital in the future period.
D) having more capital in the current period.
E) increases in the prices of stocks.

Question 37

The output supply curve is the relationship between output and

A) labour supply.
B) real interest rates.
C) total factor productivity.
D) investment.
E) capital stock.

Question 38

An asymmetric information problem arises when

A) interest rates exceed r.
B) the representative firm is unable to borrow.
C) there are more bad firms than good firms that wish to borrow.
D) the lender is not able to distinguish between a good borrower and a bad borrower.
E) the managers of bad firms consumer the borrowed funds as executive compensation.

Question 39

When drawn against the real interest rate, the optimal investment schedule shifts to the right if

A) current total factor productivity z increases.
B) current total factor productivity z decreases.
C) future total factor productivity z' increases.
D) future total factor productivity z' decreases.
E) future total factor productivity z' remains constant.

Question 40

The marginal benefit from investment for a firm is equal to

A)
B)
C)
D)
E)

Question 41

When drawn against the real interest rate, the output demand curve shifts to the right when

A) current capital stock decreases.
B) current capital stock increases.
C) real wage rate decreases.
D) real wage rate increases.
E) current capital stock and real wage rate increases.

Question 42

The decrease in lifetime wealth affects consumption demand by

A) -MPC(G? - G?).
B) MPC(G? - G?).
C) r(G? - G?).
D) (1 - MPC)(G? - G?).
E) does not affect it.

Question 43

The total government expenditure multiplier is less than one because

A) labour supply reacts to interest rate changes and consumption demand is affected by taxes.
B) investment demand falls dramatically when the government goes into debt.
C) government expenditures affect labour demand.
D) the marginal propensity to consume is greater than one.
E) the marginal propensity to consume is less than one.

Question 44

When drawn against the real interest rate, the output demand curve unambiguously shifts to the right if either or both of the following occur.

A) an increase in current taxes and an increase in future taxes
B) an increase in current taxes and a decrease in future taxes
C) a decrease in current taxes and an increase in future taxes
D) a decrease in current taxes and a decrease in future taxes
E) an increase in current taxes and a reduction in interest rates

Question 45

The total government expenditure multiplier

A) is the ratio of total increase in real output to the increase in government spending.
B) is the total increase in the demand for goods.
C) equals
D) is the ratio of total increase in demand for goods to the increase in government spending.
E) equals the MPC.

Question 46

A temporary increase in government spending that leads to only a small decline in lifetime wealth likely shifts the output demand curve to the

A) right by more than the rightward shift in output supply.
B) right by less than the rightward shift in output supply.
C) left by more than the leftward shift in output supply.
D) left by less than the leftward shift in output supply.
E) right by the same amount as the rightward shift in output supply.

Question 47

The output demand curve shows the

A) positive relationship between the wage rate and current aggregate output.
B) negative relationship between the wage rate and current aggregate output.
C) positive relationship between total factor productivity and current aggregate output.
D) positive relationship between the real interest rate and current aggregate output.
E) negative relationship between the real interest rate and current aggregate output.

Question 48

An increase in total factor productivity causes

A) real wages to rise.
B) labour supply to fall.
C) the output supply curve to shift left.
D) real interest rates to rise.
E) the production function to shift up.

Question 49

The total government expenditure multiplier is

A) larger than 1.
B) between 0 and 1.
C) equal to the MPC.
D) equal to
E) 1.

Question 50

When drawn against the real interest rate, the output demand curve shifts to the right when

A) current total factor productivity z increases.
B) current total factor productivity z decreases.
C) future total factor productivity z' increases.
D) future total factor productivity z' decreases.
E) current and future total factor productivity z' decreases.

Question 51

In response to a temporary increase in government spending, the representative consumer consumes

A) more and takes more leisure.
B) more and takes less leisure.
C) less and takes more leisure.
D) less and takes less leisure.
E) the same amount as leisure.

Question 52

The equilibrium effects of a temporary increase in government spending include

A) an increase in the real wage and an increase in the real interest rate.
B) an increase in the real wage and a decrease in the real interest rate.
C) a decrease in the real wage and an increase in the real interest rate.
D) a decrease in the real wage and a decrease in the real interest rate.
E) real wages and the real interest rate remaining unchanged.

Question 53

An increase in government spending

A) increases taxes and reduces the marginal propensity to consume.
B) increases taxes and reduces lifetime wealth of consumers.
C) reduces taxes and reduces lifetime wealth of consumers.
D) increases taxes and increases the marginal propensity to consume.
E) does not affect the present value of taxes, thus does not affect the lifetime wealth of consumers.

Question 54

If government spending increases then, given the real interest rate,

A) the demand for goods increases more than one-for-one.
B) the demand for goods increases less than one-for-one.
C) the demand for goods is unchanged, due to crowding out.
D) the demand for goods increases one-for-one.
E) the demand for goods doubles.

Question 55

When drawn against the real interest rate, the output demand curve shifts to the right when

A) future income increases.
B) future taxes increase.
C) the real interest rate decreases.
D) both future and current taxes increase.
E) the real interest rate increases.

Question 56

An increase in total factor productivity causes the

A) production function to shift up, labour demand to shift right, and output supply to shift right.
B) production function to shift up, labour demand to shift left, and output supply to shift right.
C) production function to shift up, labour demand to shift right, and output supply to shift left.
D) production function to shift down, labour demand to shift left, and output supply to shift left.
E) production function to shift down, labour demand to shift right, and output supply to shift right.

Question 57

The destruction of capital

A) benefits an economy, as higher investment must make output go up.
B) necessarily makes output go down.
C) makes real interest rates go down.
D) has no effect on the economy at all.
E) may increase employment enough that output increases.

Question 58

When drawn against current income, the slope of the C? ??? ? ?? ??? ? ? curve is equal to the marginal

A) product of capital.
B) product of labour.
C) propensity to consume.
D) propensity to save.
E) benefit from investment.

Question 59

The response of output following a natural disaster includes

A) an increase in output demand and an increase in output supply.
B) an increase in output demand and a decrease in output supply.
C) a decrease in output demand and an increase in output supply.
D) a decrease in output demand and a decrease in output supply.
E) only a decrease in output demand.

Question 60

The partial expenditure multiplier

A) is the total increase in the demand for goods.
B) is the total increase in government spending.
C) equals (1 - MPC).
D) is the ratio of total increase in demand for goods to the increase in government spending.
E) equals the MPC.

Question 61

When future total factor productivity is expected to increase,

A) investment demand decreases and output demand decreases.
B) investment demand increases and output demand increases.
C) current labour demand increases and output supply increases.
D) investment demand increases and output supply increases.
E) investment demand increases and output supply decreases.

Question 62

An individual stock price

A) determines investment spending.
B) mimics the information contained in the stock market index.
C) determines the future performance of the firm.
D) incorporates all news about the firm's future prospects.
E) is inversely related to the interest rate.

Question 63

A decrease in credit market risk does not cause the following to happen.

A) The real interest rate goes down.
B) Output demand increases.
C) Output supply decreases.
D) Investment declines.
E) The real wage must rise.

Question 64

When there is a temporary increase in total factor productivity,

A) labour demand increases and output supply decreases.
B) labour demand decreases and output demand increases.
C) labour demand increases and output demand increases.
D) labour demand decreases and output supply decreases.
E) labour demand increases and output supply increases.

Question 65

What are three factors that determine current labour supply?

Question 66

In the real intertemporal model, an increase in credit market risk implies

A) output demand shifts left and output supply shifts right, increasing the real interest rate.
B) output demand shifts right and output supply shifts left, the real interest rate is constant.
C) output demand shifts left and output supply shifts left, decreasing the real interest rate.
D) output demand shifts left and output supply is constant, increasing the real interest rate.
E) output demand shifts left and output supply shifts right, decreasing the real interest rate.

Question 67

The solution to the recent financial crisis is

A) better financial disclosure and adequate regulatory supervision of credit markets.
B) higher borrowing costs for riskier firms.
C) higher interest rates to discourage risky borrowing.
D) expansionary fiscal policy.
E) government extending credit to consumers and firms.

Question 68

The equilibrium effects of a temporary increase in total factor productivity include

A) an increase in the real wage and an increase in the real interest rate.
B) an increase in the real wage and a decrease in the real interest rate.
C) a decrease in the real wage and an increase in the real interest rate.
D) a decrease in the real wage and a decrease in the real interest rate.
E) only a decrease in the real interest rate.

Question 69

How many of the following business cycle facts can be explained if the primary cause of business cycles is temporary changes in total factor productivity: procyclical consumption, procyclical investment, procyclical employment, and procyclical real wages?

A) one
B) two
C) three
D) four
E) none

Question 70

Which one of the following is a key determinant of aggregate economic activity in the present?

A) news about future incomes
B) social security developments
C) expectations about future monetary policy
D) future taxes
E) future government spending

Question 71

The equilibrium effects of a prospective future increase in total factor productivity include

A) an increase in the real wage and an increase in the real interest rate.
B) an increase in the real wage and a decrease in the real interest rate.
C) a decrease in the real wage and an increase in the real interest rate.
D) a decrease in the real wage and a decrease in the real interest rate.
E) a decrease in the real wage only.