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

Question 1

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

Answer 1

the quantity of capital, quantity of labor, and production technology

Question 2

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

Answer 2

goods; factor

Question 3

A competitive firm:

A) is small relative to the market in which it trades.
B) has to charge a lower price when it wants to sell more goods.
C) has several large competitors with whom it engages in fierce competition.
D) can set the wage at which it hires workers.

Answer 3

is small relative to the market in which it trades.

Question 4

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 5

If bread is produced by 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 6

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 7

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 8

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 9

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

A) multiply capital by z₁ and labor by z₂, we multiply output by z₃.
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

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 11

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 12

A production function is a technological 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 13

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 labor costs.

Question 14

A competitive firm chooses the:

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

Question 15

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 16

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 17

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.

Question 18

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 19

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

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

Question 20

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 21

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.

Question 22

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 23

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 24

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 25

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 26

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 capital.
D) depends on the state of technology.

Question 27

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 28

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 is added when another factor remains fixed, the marginal product of that factor diminishes.

Question 29

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 30

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 31

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 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 32

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 33

In fourteenth-century Europe, the bubonic plague:

A) reduced the population of Europe by about one-half.
B) substantially increased economic output in Europe.
C) substantially increased real rentals on land in Europe.
D) substantially increased real wages in Europe.

Question 34

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 35

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 36

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) all firms maximize profits and none are competitive.
D) all firms maximize profits and all factors are paid their marginal products.

Question 37

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.

Question 38

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

A) decreases as the amount of labor increases.
B) increases as the amount of labor increases.
C) increases as the amount of capital increases.
D) is independent of the amount of labor.

Question 39

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

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

Question 40

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) decrease the real interest rate.

Question 41

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 42

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 43

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

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

Question 44

Investment goods as measured in the GDP are purchased by:

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

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) average labor productivity is growing rapidly.
D) capital's share of income is growing rapidly.

Question 46

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 47

The marginal propensity to consume is:

A) normally expected to be between zero and one.
B) equal to consumption divided by disposable income.
C) normally assumed to decrease as disposable income increases.
D) normally assumed to increase as disposable income increases.

Question 48

According to Goldin and Katz, the increasing income inequality of recent decades is the result of:

A) increases in the rates of technological advance and educational attainment.
B) decreases in the rates of technological advance and educational attainment.
C) a steady pace of technological advance and a slowdown in educational advance.
D) a decrease in the rate of technological advance and an increase in the rate of educational advance.

Question 49

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:

A) space exploration.
B) capital expenditures.
C) education.
D) transfer payments.

Question 50

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 51

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

Question 52

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 53

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 54

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 55

A consumption function shows the relationship between consumption and:

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

Question 56

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity is growing rapidly:

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

Question 57

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 58

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 59

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 60

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 61

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

A) $200,000 at 8 percent.
B) $100,000 at 12 percent.
C) $100,000 at 8 percent.
D) $200,000 at 12 percent.

Question 62

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

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

Question 63

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 64

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 65

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 66

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 67

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 68

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 69

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 70

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 71

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

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

Question 72

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 73

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 74

The equation may be solved for the equilibrium level of:

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

Question 75

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 76

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 77

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 78

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 rate
D) disposable income; the interest rate; exogenously

Question 79

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 80

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.