Question 1

The supply of loanable funds is equivalent to:

Accepted Answer

A) national saving. 
B) private saving. 
C) public saving. 
D) investment.

Question 2

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:

Accepted Answer

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 3

Assume that the production function is given by Y = AK^0.5L^0.5, where Y is GDP, K is capital stock, and L is labour. The parameter A is equal to 10. Assume also that capital is 100, labour is 400, and both capital and labour are paid for their marginal products. a.What is Y? b.What is the real wage of labour? c.What is the real rental price of capital (the amount of output paid per unit of capital)?

Accepted Answer

The answer of Assume that the production function is given...

Question 4

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:

Accepted Answer

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 5

In a closed economy, private saving equals:

Accepted Answer

A) Y - C - G. 
B) Y - T - C. 
C) Y - I - C. 
D) Y - T.

Question 6

In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving _____ and private saving _____.

Accepted Answer

A) increases; increases 
B) increases; does not change 
C) decreases; increases 
D) decreases; does not change

Question 7

Assume that the production function is Cobb-Douglas with parameter α = 0.3. In the neoclassical model, if the labour force increases by 10 percent, then output:

Accepted Answer

A) increases by about 10 percent. 
B) increases by about 7 percent. 
C) increases by about 3 percent. 
D) does not increase since the new workers are unemployed.

Question 8

Assume that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 1,200 + 0.3(Y - T) - 50r, where r is the real interest rate, in percent. Investment (I) is given by the equation I = 1,500 - 50r. Taxes (T) are 1,000, and government spending (G) is 1,500.
​
a.What are the equilibrium values of C, I, and r?
b.What are the values of private saving, public saving, and national saving?
c.Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to I = 2,000 - 50r. What are the new equilibrium values of C, I, and r?
d.What are the new values of private saving, public saving, and national saving?​

Accepted Answer

The answer of Assume that GDP (Y) is 5,000. Consumption...

Question 9

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

Accepted Answer

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 10

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wages of:

Accepted Answer

A) both barbers and farmers should have remained constant over time. 
B) both barbers and farmers should have risen over time. 
C) farmers should have risen while the real wage of barbers should have remained constant. 
D) barbers should have risen while the real wage of farmers should have remained constant.

Question 11

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

Accepted Answer

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 12

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:

Accepted Answer

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

Question 13

Assume that the production function is Cobb-Douglas with parameter α = 0.3. If capital and labour are paid their marginal products, they receive the shares of income:

Accepted Answer

A) 0.3 and 0.3. 
B) 0.7 and 0.7. 
C) 0.3 and 0.7. 
D) 0.7 and 0.3.

Question 14

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

Accepted Answer

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

Question 15

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, investment:

Accepted Answer

A) rises by $100 billion. 
B) rises by $60 billion. 
C) falls by $60 billion. 
D) falls by $100 billion.

Question 16

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

Accepted Answer

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

Question 17

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

Accepted Answer

A) -200. 
B) 200. 
C) 500. 
D) 1,800.

Question 18

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y - T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 - 100r, where r is the real interest rate, in percent. In this case, the equilibrium real interest rate is:

Accepted Answer

A) 5 percent. 
B) 8 percent. 
C) 10 percent. 
D) 13 percent.

Question 19

If a technological advancement increases productivity, the neoclassical theory of distribution predicts that:

Accepted Answer

A) the real wage will rise, and the real rental price of capital will fall. 
B) both the real wage and the real rental price of capital will fall. 
C) both the real wage and the real rental price of capital will rise. 
D) the real wage will fall, and the real rental price of capital will rise.

Question 20

Public saving is:

Accepted Answer

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

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