Question 1

An asymmetric information problem arises when

Accepted Answer

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 2

The marginal benefit from investment for a firm is equal to

Accepted Answer

A)   
B)   
C)   
D)   
E)

Question 3

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

Accepted Answer

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 4

When future total factor productivity is expected to increase,

Accepted Answer

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 5

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

Accepted Answer

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 6

An increase in government spending

Accepted Answer

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 7

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

Accepted Answer

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.

Question 8

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

Accepted Answer

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 9

When there is a temporary increase in total factor productivity,

Accepted Answer

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 10

The condition MRS1,C = w describes the representative consumer's

Accepted Answer

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 11

The destruction of capital

Accepted Answer

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 12

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

Accepted Answer

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.

Question 13

The condition MRS1'C' = w' describes the representative consumer's

Accepted Answer

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

Accepted Answer

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 15

The output supply curve is the relationship between output and

Accepted Answer

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

Question 16

The firm will hire current labour until

Accepted Answer

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 17

The decrease in lifetime wealth affects consumption demand by

Accepted Answer

A)  -MPC(G2 - G1). 
B)  MPC(G2 - G1). 
C)  r(G2 - G1). 
D)  (1 - MP
C) (G2 - G1). 
E)  does not affect it.

Question 18

A consumer may increase his or her saving by

Accepted Answer

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 19

Optimal investment is

Accepted Answer

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 20

What are three factors that determine current labour supply?

Accepted Answer

The answer of What are three factors that determine current...

Exam 11: A Real Intertemporal Model with Investment