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

Question 1

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

Answer 1

factor; financial

Question 2

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

A)constant marginal product of labour.
B)increasing marginal product of labour.
C)constant returns to scale.
D)increasing returns to scale.

Answer 2

constant returns to scale.

Question 3

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.

Answer 3

consumption, taxes, and saving.

Question 4

The price received by each factor of production 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 5

The real wage is the return to labour measured in:

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

Question 6

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 7

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

A)multiply capital by z₁ and labour by z₂, we multiply output by z₃.
B)increase capital and labour by 10 percent each, we increase output by 10 percent.
C)increase capital and labour by 5 percent each, we increase output by 10 percent.
D)increase capital by 10 percent and increase labour by 5 percent, we increase output by 7.5 percent.

Question 8

A competitive firm chooses the:

A)price at which to sell the product produced.
B)wage to pay labour.
C)quantity of labour and capital to employ.
D)rental price to pay capital.

Question 9

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.

Question 10

A firm's economic profit is:

A)the price of output minus the wage minus the rental price of capital.
B)revenue minus costs.
C)revenue plus capital costs.
D)the price of output minus labour costs.

Question 11

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 12

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

A)number of workers is doubled, twice as much bread will be produced.
B)amount of equipment is doubled, twice as much bread will be produced.
C)amounts of equipment and workers are both doubled, twice as much bread will be produced.
D)amounts of equipment and workers are both doubled, four times as much bread will be produced.

Question 13

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

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

Question 14

A production function is a mathematical relationship between:

A)factor prices and the marginal product of factors.
B)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 15

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 labour are added.
D)the value of additional output when one dollar's worth of additional capital is added.

Question 16

The two most important factors of production are:

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

Question 17

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

A)capital and labour are fully utilized.
B)all capital is fully utilized, but some labour is unemployed.
C)all labour is fully employed, but some capital lies idle.
D)some capital lies idle, and some labour is unemployed.

Question 18

The marginal product of labour is:

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

Question 19

The assumption that the factor's supply is fixed will imply that the factor's

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.

Question 20

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

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

Question 21

According to a recent report from the OECD, the increasing income inequality of recent decades in Canada is the result of:

A)decreases in the rates of skill-biased technological advancement and increases in the self-employment rates.
B)decreases in the rates of skill-biased technological advancement and in the self-employment rates.
C)increases in the rate of skill-biased technological advancement and in the self-employment rates.
D)decreases in the rates of skill-biased technological advancement and stagnant self-employment rates.

Question 22

Since 1960, the Canadian ratio of labour income to total income has:

A)been about 2.5 to 1.
B)remained relatively steady.
C)increased steadily.
D)decreased steadily.

Question 23

Assuming that all firms maximize profits, 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.
C)no firms are competitive.
D)all factors are paid their marginal products.

Question 24

What determines the ratio of the wage to rental rate of capital in a competitive, profit-maximizing economy with constant returns to scale?

A)the quantity of economic profits earned by firm owners
B)the interest rate
C)the ratio of public saving to private saving
D)the marginal productivity of labour relative to the marginal productivity of capital

Question 25

With a Cobb-Douglas production function, the share of output going to labour:

A)decreases as the amount of labour increases.
B)increases as the amount of labour increases.
C)increases as the amount of capital increases.
D)does not depend on the amount of labour in the economy.

Question 26

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

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

Question 27

The real wage will increase if:

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

Question 28

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 29

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

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

Question 30

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

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

Question 31

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)1,000.

Question 32

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

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

Question 33

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 34

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

A)supply.
B)equilibrium growth rates.
C)relative political power.
D)marginal productivities.

Question 35

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 36

An increase in the supply of capital will:

A)increase the real rental price of capital.
B)decrease the real rental price of capital.
C)increase the productivity of capital.
D)increase the marginal product of capital.

Question 37

Accounting profit is:

A)economic 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 38

Skill-biased technological change _____ the demand for high-skilled workers, while a slowdown in the pace of educational advancement reduces the supply of skilled workers. If we observed both of these phenomena, we would expect _____ wages for skilled workers.

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

Question 39

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

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

Question 40

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

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

Question 41

A consumption function shows the relationship between consumption and:

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

Question 42

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 43

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + 0.2Y, and Y = 50K^0.5L^0.5, where K = 100. If L increases from 100 to 144, then consumption increases by:

A)560.
B)840.
C)1,120.
D)2,120.

Question 44

The marginal propensity to consume is:

A)expected to be between zero and one.
B)equal to disposable income divided by consumption.
C)the amount by which consumption changes when wealth increases by one dollar.
D)normally assumed to increase as taxes increase.

Question 45

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when:

A)real interest rates are high.
B)real interest rates are low.
C)labour productivity is growing rapidly.
D)capital's share of income is growing rapidly.

Question 46

Consumption depends _____ on disposable income, and investment depends _____ on the real interest rate.

A)positively; positively
B)positively; negatively
C)negatively; negatively
D)negatively; positively

Question 47

Since 1990, the share of income that flows to the top 1 percent of income earners has:

A)increased in Canada.
B)decreased in Canada.
C)not changed in Canada.
D)gone up and down in Canada.

Question 48

Assume that the consumption function is given by C = 150 + 0.85(Y - T), the tax function is given by T = t₀ + t₁Y, and Y is 5,000. If t₁ decreases from 0.3 to 0.2, then consumption increases by:

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

Question 49

Since 1990, the share of income that flows to the bottom 50 percent of income earners has:

A)continuously increased in Canada.
B)decreased in Canada.
C)not changed in Canada.
D)gone up and down in Canada.

Question 50

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

A)taxes.
B)interest.
C)loans.
D)Canada pension plan and employment insurance contributions.

Question 51

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

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 52

In a closed economy, the components of GDP are:

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

Question 53

Private investment goods as measured in GDP are purchased by:

A)business firms alone.
B)households alone.
C)business firms and households.
D)business firms, households, and governments.

Question 54

Assume that the consumption function is given by C = 150 + 0.85(Y - T) and the tax function is given by T = t₀ + t₁Y. If t₀ increases by 1 unit, then consumption:

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 55

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 56

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

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

Question 57

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

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 58

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + t₁Y, and Y = 50K^0.5L^0.5, where K = 100 and L = 100. If t₁ increases from 0.2 to 0.25, then consumption decreases by:

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

Question 59

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 60

Assume that an economy is described by a Cobb-Douglas production function. If average labour productivity is growing rapidly:

A)labour's share of total income will be increasing.
B)labour's share of total income will be decreasing.
C)workers will experience high rates of real wage growth.
D)economic profits will be positive.

Question 61

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 62

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 63

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

A)federal government sending an Old Age Security cheque to Betty Jones.
B)federal government sending a paycheque to the prime minister of Canada.
C)federal government buying a military plane.
D)city of Toronto buying a library book.

Question 64

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

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

Question 65

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)labour's share of output; capital's share of output; by the interest rate
D)disposable income; the interest rate; exogenously

Question 66

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 67

Government transfer payments:

A)are included as part of government purchases, G.
B)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

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

A)federal spending on goods.
B)provincial and municipal spending on goods.
C)federal spending on transfer payments.
D)federal spending on services.

Question 69

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 70

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 71

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 72

Total investment in Canada averages about _____ percent of GDP.

A)9
B)12
C)18
D)27

Question 73

The real interest rate is the:

A)rate of interest actually paid by consumers.
B)rate of interest actually paid by banks.
C)rate of inflation minus the nominal interest rate.
D)nominal interest rate minus the rate of inflation.

Question 74

The nominal interest rate is the:

A)rate of interest that investors pay to borrow money.
B)same as the real interest rate.
C)rate of inflation minus the real rate of interest.
D)real rate of interest minus the rate of inflation.

Question 75

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 76

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 77

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 78

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.
C)is equal to consumption, investment, and government purchases.
D)is determined by government purchases and taxes.

Question 79

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 of
C)low; exceeds
D)low; falls short of

Question 80

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

A)the rate on 90-day Treasury bills.
B)the overnight rate.
C)the mortgage rate.
D)no particular interest rate; it's usually an innocuous assumption since real interest rates tend to move up and down together.