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

Question 1

When factor supply is fixed and quantity of the factor is graphed on the horizontal axis while factor price is graphed on the vertical axis, the factor:

A)supply curve is horizontal.
B)supply curve is vertical.
C)supply curve slopes up to the right.
D)demand curve slopes up to the right.

Answer 1

B

Question 2

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

A)factors of production and production function.
B)real and nominal interest rate.
C)government budget surplus or deficit.
D)rate of economic and accounting profit.

Answer 2

A

Question 3

A competitive, profit-maximizing firm hires labor until the:

A)marginal product of labor equals the wage.
B)price of output multiplied by the marginal product of labor equals the wage.
C)real wage equals the real rental price of capital.
D)wage equals the rental price of capital.

Answer 3

B

Question 4

The real wage is the return to labor measured in:

A)dollars.
B)units of output.
C)units of labor.
D)units of capital.

Question 5

The real rental price of capital is the price per unit of capital measured in:

A)dollars.
B)units of output.
C)units of labor.
D)units of capital.

Question 6

The neoclassical theory of distribution:

A)was developed by Karl Marx.
B)is rejected by most economists today.
C)shows that the national income of an economy is not equal to total output.
D)is a theory of how national income is divided among the factors of production.

Question 7

The property of diminishing marginal product means that, after a point, when additional quantities of:

A)a factor are added, output diminishes.
B)both labor and capital are added, output diminishes.
C)both labor and capital are added, the marginal product of labor diminishes.
D)a factor are added when another factor remains fixed, the marginal product of the first factor diminishes.

Question 8

The two most important factors of production are:

A)goods and services.
B)labor and energy.
C)capital and labor.
D)saving and investment.

Question 9

The production function feature called "constant returns to scale" means that if we:

A)multiply capital by z and labor by z , we multiply output by z 1 2 3
B)increase capital and labor by 10 percent each, we increase output by 10 percent.
C)increase capital and labor by 5 percent each, we increase output by 10 percent.
D)increase capital by 10 percent and increase labor by 5 percent, we increase output by 7.5 percent.

Question 10

In the circular flow diagram, firms receive revenue from the market, which is used to purchase inputs in the market.

A)goods;financial
B)factor;financial
C)goods; factor
D)factor; goods

Question 11

The marginal product of labor is:

A)output divided by labor input.
B)additional output produced when one additional unit of labor is added.
C)additional output produced when one additional unit of labor and one additional unit of capital are added.
D)value of additional output when one dollar's worth of additional labor is added.

Question 12

The circular flow model shows that households use income for:

A)consumption, saving, and factor payments.
B)consumption, taxes, and factor payments.
C)taxes, saving, and factor payments.
D)consumption, taxes, and saving.

Question 13

At any particular point in time, the output of the economy:

A)is fixed because the supplies of capital and labor and the technology are fixed.
B)is fixed because the demand for goods and services is fixed.
C)varies because the supplies of capital and labor vary.
D)varies because the technology for turning capital and labor into goods and services varies.

Question 14

In the long run, what determines the level of total production of goods and services in an economy?

A)the interest rate and the amount of national saving
B)the quantity of capital, quantity of labor, and production technology
C)consumption, investment, and government spending
D)the marginal products of capital and labor, constant returns to scale, and competition

Question 15

A production function is a technological relationship between:

A)factor prices and the marginal product of
B)factors. factors of production and factor prices.
C)factors of production and the quantity of output produced.
D)factor prices and the quantity of output produced.

Question 16

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

A)all factors of production are fully utilized.
B)all capital is fully utilized but some labor is unemployed.
C)all labor is fully employed but some capital lies idle.
D)some capital lies idle and some labor is unemployed.

Question 17

The marginal product of capital is:

A)output divided by capital input.
B)additional output produced when one additional unit of capital is added.
C)additional output produced when one additional unit of capital and one additional unit of labor are added.
D)value of additional output when one dollar's worth of additional capital is added.
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Question 18

The price received by each factor of production for its services is determined by:

A)demand for output and supply of factors.
B)demand for factors and supply of output.
C)demand and supply of output.
D)demand and supply of factors.

Question 19

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

A)goods; financial
B)factor;financial
C)goods; factor
D)factor; goods

Question 20

An economy's factors of production and its production function determine the economy's:

A)labor force participation rate.
B)budget surplus or deficit.
C)population growth rate.
D)output of goods and services.

Question 21

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

A)increased.
B)decreased.
C)did not change.
D)were negative.

Question 22

Accounting profit is:

A)Aeconomic profit minus the return to capital.
B)equal to economic profit.
C)economic profit plus the return to capital.
D)equal to the economic return to capital.

Question 23

The real wage will increase if:

A)the supply of labor increases.
B)the productivity of labor increases.
C)the price of output increases.
D)the supply of capital decreases.

Question 24

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:

A)total investment.
B)total saving.
C)total profits.
D)total output.

Question 25

In a Cobb-Douglas production function the marginal product of labor will increase if:

A)the quantity of labor increases.
B)the quantity of capital increases.
C)capital's share of output increases.
D)average labor productivity decreases.

Question 26

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

A)constant returns to scale.
B)diminishing returns to scale.
C)increasing returns to scale.
D)a degree of returns to scale that cannot be determined from the information given.

Question 27

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

A)space exploration.
B)capitalexpendituresC.education.
D)transfer payments.

Question 28

In a closed economy, the components of GDP are:

A)consumption, investment, government purchases, and exports.
B)consumption, investment, government purchases, and net
C)exports. consumption, investment, and government purchases.
D)consumption and investment.

Question 29

In a Cobb-Douglas production function the marginal product of capital will increase if:

A)the quantity of labor increases.
B)the quantity of capital increases.
C)labor's share of output increases.
D)average capital productivity decreases.

Question 30

If the production function describing an economy is Y = 100 K^.25L^.75, then the share of output going to labor:

A)is 25 percent.
B)is 75 percent.
C)depends on the quantities of labor and
D)capital. depends on the state of technology.

Question 31

Disposable personal income is defined as income after the payment of all:

A)taxes.
B)interest.
C)loans.
D)social insurance contributions.

Question 32

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.

A)Aincreases; higher
B)increases; lower
C)decreases; higher
D)decreases; lower

Question 33

If Y = AK^0.5L^0.5 and A, K, and L are all 100, the marginal product of capital is:

A)50.
B)100.
C)200.
D)1000.

Question 34

The neoclassical theory of distribution explains the allocation of:

A)output between goods and services.
B)output among consumption, investment, and government spending.
C)income among factors of production.
D)income between saving and investment.

Question 35

Economic profit is zero if:

A)all factors are paid their marginal products and the law of diminishing returns is valid.
B)all factors are paid their marginal products and there are constant returns to scale. all firms maximize profits and none are competitive. all firms maximize profits and all factors are paid their marginal products.

Question 36

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

A)been about 2.5 to 1.
B)been about 0.7.
C)increased steadily.
D)decreased steadily.

Question 37

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

A)the average price level
B)the interest rate
C)the real rental price of capital
D)the real wage

Question 38

According to the neoclassical theory of distribution, if firms are competitive and subject to constant total income in the economy is distributed:

A)only to the labor used in production.
B)partly between labor and capital used in production, with the surplus going to the owners of the firm as profits.
C)equally between the labor and capital used in production.
D)between the labor and capital used in production, according to their marginal productivities.

Question 39

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

A)public saving and private saving.
B)the quantity of capital and labor and production technology.
C)consumption, investment, and government spending.
D)government purchases and transfer payments minus tax receipts.

Question 40

What determines the distribution of national income between labor and capital in a competitive, profit-maximizing economy with constant returns to scale?

A)the relative quantity of labor to capital
B)the interest rate
C)the ratio of public saving to private saving
D)the marginal productivity of labor relative to the marginal productivity of capital

Question 41

A consumption function shows the relationship between consumption and:

A)income.
B)personal income.
C)disposable income.
D)taxes.

Question 42

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

A)10
B)15
C)20
D)25

Question 43

When economists speak of "the" interest rate, they mean:

A)the rate on 90-day Treasury bills.
B)the rate on 30-year government bonds.
C)the "prime" rate on loans.
D)no particular interest rate, since it is assumed that various interest rates tend to move up and down together.

Question 44

Assume that the consumption function is given by C = 150 + 0.85(Y - T), the tax function is given by T = t + t Y, and Y 0 1
Is 5,000. If t decreases from 0.3 to 0.2, then consumption increases by:
1

A)85.
B)425.
C)500.
D)525.

Question 45

The government spending component of GDP includes all of the following except:

A)federal spending on goods.
B)state and local spending on goods.
C)federal spending on transfer payments.
D)federal spending on services.

Question 46

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:

A)2,500.
B)2,800.
C)3,500.
D)4,200.

Question 47

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

A)decreases by 0.85 units.
B)decreases by 0.15 units.
C)increases by 0.15 units.
D)increases by 0.85 units.

Question 48

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

A)0.15 units.
B)0.5 units.
C)0.85 units.
D)1 unit.

Question 49

Assume that the consumption function is given by C = 150 + 0.85(Y - T) and the tax function is given by T = t + t Y. If 0 1
T increases by 1 unit, then consumption:
0

A)decreases by 0.85 units.
B)decreases by 0.15 units.
C)increases by 0.15 units.D.increases by 0.85 units.

Question 50

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K^0.5L^0.5, where K = 100 and L = 100, then C equals:

A)1,000.
B)2,500.
C)3,000.
D)5,000.

Question 51

If government purchases exceed taxes minus transfer payments, then the government budget is:

A)balancd
B)in deficit.
C)in surplus.
D)endogenous.

Question 52

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:

A)6 percent.
B)12 percent.
C)18 percent.
D)30 percent.

Question 53

Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be:

A)240.
B)700.
C)760.
D)970.

Question 54

The investment function slopes because there are investment projects that are profitable as the interest rate decreases.

A)upward; fewer
B)upward; more
C)downward;fewer
D)downward; more

Question 55

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + t Y, and 1
Y = 50K^0.5L^0.5, where K = 100 and L = 100. If t increases from 0.2 to 0.25, then consumption decreases by:
1

A)70.
B)140.
C)175.
D)250.

Question 56

Other things equal, an increase in the interest rate leads to:

A)a decrease in the quantity of investment goods demanded.
B)no change in the quantity of investment goods demanded.
C)an increase in the quantity of investment goods demanded.
D)sometimes an increase and sometimes a decrease in the quantity of investment goods demanded.

Question 57

Consumption depends positively on and investment depends negatively on .

A)disposable income; the real interest rate
B)the real interest rate; disposable income
C)private saving; public saving
D)public saving; private saving

Question 58

All of the following actions increase government purchases of goods and services except the:

A)federal government's sending a Social Security check to Betty Jones.
B)federal governments sending a paycheck to the president of the United States.
C)federal government's buying a Patriot missile.
D)city of Boston's buying a library book.

Question 59

Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides that it should:

A)not build because the rate of return on the factory is only 6 percent.
B)not build because the rate of return on the factory is only 12 percent.
C)build because the rate of return on the factory is 30 percent.
D)build because the rate of return on the factory is 35 percent.

Question 60

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

A)decreases by 0.85 units.
B)decreases by 0.15 units.
C)increases by 0.15 units.
D)increases by 0.85 units.

Question 61

If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is:

A)300.
B)500.
C)1,000.
D)1,300.

Question 62

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

A)high; exceeds
B)high; falls short
C)of low; exceeds
D)low; falls short of

Question 63

The equation may be solved for the equilibrium level of:

A)income.
B)consumption.
C)government purchases.
D)the interest rate.

Question 64

Private saving is:

A)income minus consumption minus government spending.
B)disposable income minus consumption.
C)disposable income minus government spending.
D)taxes minus government spending.

Question 65

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

A)increase.
B)decrease.
C)remain unchanged.
D)either increase or decrease, depending on whether consumption is greater or less than investment.

Question 66

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

A)increase.
B)decrease.
C)remain unchanged.
D)either increase or decrease, depending on whether consumption is greater or less than investment.

Question 67

Government transfer payments:

A)are included as part of government purchases,
B)G. can be viewed as negative tax payments, T.
C)are received as payment for inputs in the factor market.
D)do not affect the level of public or private saving.

Question 68

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

A)consumption, investment, and the interest rate are endogenous variables.
B)consumption, investment, and the interest rate are exogenous variables.
C)government purchases, taxes, and interest rates are endogenous variables.
D)government purchases, taxes, and interest rates are exogenous variables.

Question 69

Public saving is:

A)always positive.
B)always negative.
C)always zero.
D)either positive, negative, or zero.

Question 70

Public saving is:

A)income minus consumption minus government spending.
B)disposable income minus consumption.
C)disposable income minus government spending.
D)government revenue minus government spending.

Question 71

The factor that makes national saving equal investment, in equilibrium, is:

A)the interest rate.
B)private saving.
C)public saving.
D)fiscal policy.

Question 72

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

A)government spending.
B)taxes.
C)fiscal policy.
D)the interest rate.

Question 73

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

A)high; exceeds
B)high; falls short
C)of low; exceeds
D)low; falls short of

Question 74

National saving is:

A)private saving.
B)public saving.
C)private saving plus public saving.
D)private saving minus public saving.

Question 75

In a classical model with fixed factors of production and flexible prices, the amount of consumption spending depends on , the amount of investment spending depends on , and the amount of government spending is determined .

A)the interest rate; disposable income; by tax revenue
B)the real wage; the real rental price of capital; by factor prices
C)labor's share of output; capital's share of output; by the interest
D)rate disposable income; the interest rate; exogenously

Question 76

National saving refers to:

A)disposable income minus consumption.
B)taxes minus government spending.
C)income minus consumption minus government
D)spending. income minus investment.

Question 77

The demand for the economy's output:

A)is always equal to the supply, regardless of the interest rate.
B)may be computed provided that we know disposable income.
D)is equal to consumption, investment, and government purchases.
D)is determined by government purchases and taxes.