Deck 11: A Real Intertemporal Model With Investment

Question 1

An individual stock price

A)determines the future performance of the firm.
B)incorporates all news about the firm's future prospects.
C)determines investment spending.
D)is inversely related to the interest rate.
E)mimics the information contained in the stock market index.

Answer 1

B

Question 2

Answer 2

E

Question 3

An increase in lifetime wealth

A)reduces savings.
B)increases labour supply.
C)shifts the current labour supply curve to the left.
D)shifts the current labour supply curve to the right.
E)reduces the real wage.

Answer 3

C

Question 4

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

A)more and takes less leisure.
B)more and takes more leisure.
C)the same amount as leisure.
D)less and takes more leisure.
E)less and takes less leisure.

Question 5

Question 6

Investment tends to be more variable over the business cycle than

A)aggregate output.
B)real interest rates.
C)government spending.
D)consumer income.
E)savings.

Question 7

An increase in lifetime wealth is likely to

A)increase current labour supply and increase current consumption demand.
B)decrease current labour supply and increase current leisure.
C)decrease current labour supply and decrease current leisure.
D)decrease current labour supply and decrease current consumption demand.
E)increase current labour supply and decrease current consumption demand.

Question 8

The firm will hire current labour until

A)the marginal product of labour is less than the real interest rate.
B)profits are maximized.
C)total factor productivity is maximized.
D)the marginal product of labour equals the wage rate.
E)the marginal product of labour equals total employment.

Question 9

The output supply curve is the relationship between output and

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

Question 10

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

A)current period work-leisure decision.
B)future period work- leisure decision.
C)future consumption-savings decision.
D)current consumption-savings decision.
E)investment decision.

Question 11

When the real interest rate increases, the demand for current consumption

A)shifts down.
B)moves along the demand curve.
C)shifts up.
D)increases for each level of current income.
E)remains constant.

Question 12

An increase in total factor productivity causes

A)real interest rates to rise.
B)the production function to shift up.
C)the output supply curve to shift left.
D)real wages to rise.
E)labour supply to fall.

Question 13

The slope of the demand for consumption goods is

A)equal to 1.
B)greater than 1.
C)equal to the wage rate.
D)the MPC.
E)the MRS.

Question 14

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

A)the relative price of current consumption in terms of future consumption.
B)the future real wage.
C)one.
D)savings in the current period.
E)the real interest rate.

Question 15

When drawn against the real interest rate, the output supply curve is upward sloping because labour supply is

A)independent of the real interest rate and labour demand is increasing the real interest rate.
B)increasing as the wage rate rises.
C)independent of the real interest rate and labour demand is decreasing the real interest rate.
D)increasing the real interest rate and labour demand is independent of the real interest rate.
E)decreasing the real interest rate and labour demand is independent of the real interest rate.

Question 16

The representative consumer's current labour supply curve slopes upward under the assumption that

A)the substitution effect of an increase in the real wage is less than the income effect.
B)the substitution effect of an increase in the current labour supply outweighs the income effect.
C)there is an indirect relationship between the current real wage and current labour supply.
D)the substitution effect of an increase in the real wage outweighs the income effect.
E)the substitution effect of an increase in the current labour supply is less than the income effect.

Question 17

The equilibrium effects of a prospective future increase in total factor productivity include

A)a decrease in the real wage only.
B)a decrease in the real wage and a decrease in the real interest rate.
C)an increase in the real wage and a decrease in the real interest rate.
D)a decrease in the real wage and an increase in the real interest rate.
E)an increase in the real wage and an increase in the real interest rate.

Question 18

A rational bubble is

A)when everyone behaves optimally and an asset price departs from its fundamental value.
B)when asset prices are entirely explained by fundamental factors.
C)never observed.
D)always temporary.
E)how Robert Shiller explains asset market behaviour.

Question 19

When drawn against the real interest rate, the output supply curve unambiguously shifts to the right if either or both of the following occur.

A)an increase in current government spending and a decrease in future government spending
B)a decrease in current government spending and an increase in the real interest rate
C)a decrease in current government spending and a decrease in future government spending
D)an increase in current government spending and an increase in future government spending
E)a decrease in current government spending and an increase in future government spending

Question 20

The total government expenditure multiplier is less than one because

A)investment demand falls dramatically when the government goes into debt.
B)the marginal propensity to consume is less than one.
C)labour supply reacts to interest rate changes and consumption demand is affected by taxes.
D)the marginal propensity to consume is greater than one.
E)government expenditures affect labour demand.

Question 21

For the economy as a whole, investment represents a tradeoff between

A)government spending and issuing debt.
B)interest rates and taxes.
C)present and future consumption.
D)savings and investment.
E)real interest rates and GDP.

Question 22

Investment will be more variable if the real interest rate is

A)more variable and future total factor productivity is more variable.
B)less variable and future total factor productivity is less variable.
C)more variable and future total factor productivity is less variable.
D)less variable and future total factor productivity is more variable.
E)constant with total factor productivity.

Question 23

The marginal benefit from investment is

A)what one unit of investment in the current period adds to the present value of profits.
B)related to economic activity and the real interest rate.
C)the ratio of investment to expected future profits.
D)what one unit of investment costs when funds are borrowed.
E)what one unit of investment adds to the current capital stock.

Question 24

A temporary increase in government spending that leads to only a small decline in lifetime wealth likely shifts the output demand curve to the

A)right by less than the rightward shift in output supply.
B)left by less than the leftward shift in output supply.
C)right by more than the rightward shift in output supply.
D)right by the same amount as the rightward shift in output supply.
E)left by more than the leftward shift in output supply.

Question 25

An increase in the default premium

A)lowers the real interest rate and firms invest more.
B)shifts the optimal investment schedule to the right.
C)shifts the optimal investment schedule to the left.
D)will prevent firms from defaulting on their loans.
E)raises the safe credit market interest rate.

Question 26

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

A)investment decision.
B)current period work-leisure decision.
C)current consumption-savings decision.
D)future consumption-savings decision.
E)future period work-leisure decision.

Question 27

If firm-level asymmetric information becomes more severe, then

A)investment demand increases.
B)investment demand decreases.
C)investment demand does not change.
D)there is an unambiguous effect on investment demand.
E)investment demand decreases if the substitution effect dominates, increases if the income effect dominates.

Question 28

An asymmetric information problem arises when

A)the representative firm is unable to borrow.
B)there are more bad firms than good firms that wish to borrow.
C)interest rates exceed r.
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 29

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

A)real interest rate decreases.
B)current real wage increases.
C)current real wage decreases.
D)real interest rate increases.
E)current real wage and real investment rate decreases.

Question 30

An increase in G or G' shifts the output supply curve to the right because

A)lifetime wealth decreases, a negative income effect that shifts labour supply to the right.
B)the decrease in the real interest rate shifts output supply.
C)lifetime wealth decreases, a negative income effect that shifts labour supply to the left.
D)lifetime wealth increases, a positive income effect that shifts labour supply to the right.
E)the increase in the real interest rate shifts output supply.

Question 31

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

A)substitution effect dominates the income effect in the short run.
B)substitution effect equals the income effect in the long run.
C)income effect dominates the substitution effect in the long run.
D)income effect dominates the substitution effect in the short run.
E)substitution effect dominates the income effect in the long run.

Question 32

When future total factor productivity is expected to increase

A)current labour demand increases and output supply increases.
B)investment demand decreases and output demand decreases.
C)investment demand increases and output supply decreases.
D)investment demand increases and output demand increases.
E)investment demand increases and output supply increases.

Question 33

Any increase in the present value of taxes for the consumer implies

A)a decrease in lifetime wealth and an increase in current labour supply.
B)a decrease in lifetime wealth and a decrease in current consumption demand.
C)an increase in lifetime wealth and a decrease in current labour supply.
D)a decrease in lifetime wealth and a decrease in current labour supply.
E)an increase in lifetime wealth and an increase in current labour supply.

Question 34

The partial expenditure multiplier

A)equals the MPC.
B)is the ratio of total increase in demand for goods to the increase in government spending.
C)equals (1 - MPC).
D)is the total increase in government spending.
E)is the total increase in the demand for goods.

Question 35

When drawn against the real interest rate, the output demand curve shifts to the right when

A)current capital stock decreases.
B)real wage rate increases.
C)current capital stock increases.
D)real wage rate decreases.
E)current capital stock and real wage rate increases.

Question 36

The marginal benefit from investment comes from

A)increases in the prices of stocks.
B)only increased production in the future period.
C)having more capital in the current period.
D)increased production and more undepreciated capital in the future period.
E)only increased undepreciated capital in the future period.

Question 37

The equilibrium effects of a temporary increase in government spending include

A)a decrease in the real wage and an increase in the real interest rate.
B)an increase in the real wage and a decrease in the real interest rate.
C)a decrease in the real wage and a decrease in the real interest rate.
D)real wages and the real interest rate remaining unchanged.
E)an increase in the real wage and an increase in the real interest rate.

Question 38

The difference between irrational bubbles and rational bubbles is

A)irrational bubbles occur in reality; rational bubbles do not.
B)an irrational bubble does not burst; a rational bubble does.
C)no economists believe in irrational bubbles; all economists believe in rational bubbles.
D)an irrational bubble inevitably bursts; a rational bubble does not.
E)government policy cannot correct an irrational bubble problem; government policy can correct a rational bubble problem.

Question 39

When drawn against the real interest rate, the output demand curve shifts to the right when

A)current total factor productivity z decreases.
B)future total factor productivity z' decreases.
C)future total factor productivity z' increases.
D)current total factor productivity z increases.
E)current and future total factor productivity z' decreases.

Question 40

The destruction of capital

A)may increase employment enough that output increases.
B)has no effect on the economy at all.
C)makes real interest rates go down.
D)benefits an economy, as higher investment must make output go up.
E)necessarily makes output go down.

Question 41

An increase in government spending

A)does not affect the present value of taxes, thus does not affect the lifetime wealth of consumers.
B)increases taxes and increases the marginal propensity to consume.
C)reduces taxes and reduces lifetime wealth of consumers.
D)increases taxes and reduces lifetime wealth of consumers.
E)increases taxes and reduces the marginal propensity to consume.

Question 42

An important feature of the financial market crisis was

A)increased investment by firms.
B)an increase in the safe credit market interest rate, r.
C)decreased interest rate spread on risky assets versus safe assets.
D)increased financial market uncertainty.
E)a lower opportunity cost of investment.

Question 43

An increase in the real interest rate

A)shifts the current labour supply curve to the left.
B)reduces savings.
C)reduces the real wage.
D)reduces the labour supply.
E)shifts the current labour supply curve to the right.

Question 44

A firm that is a lender finances its lending

A)through credit market imperfections.
B)with a default premium.
C)with the spread between borrowing and lending rates.
D)in the bond market.
E)with retained earnings.

Question 45

Investment will be more variable if

A)there is variability in z'' that causes movements along the investment schedule over time.
B)there is variability in r that shifts the investment schedule over time.
C)stock prices remain sufficiently volatile.
D)there is variability in z'' that shifts the investment schedule over time.
E)the real interest rate remains below the return on stocks.

Question 46

If government spending increases then, given the real interest rate

A)the demand for goods increases less than one-for-one.
B)the demand for goods increases one-for-one.
C)the demand for goods is unchanged, due to crowding out.
D)the demand for goods doubles.
E)the demand for goods increases more than one-for-one.

Question 47

Question 48

When drawn against the current real wage, the labour demand curve is

A)upward sloping because the marginal product of labour rises with the quantity of labour employed.
B)downward sloping because the marginal product of labour declines with the quantity of labour employed.
C)upward sloping because the marginal product of labour declines with the quantity of labour employed.
D)downward sloping because the marginal product of labour is constant.
E)downward sloping because the marginal product of labour rises with the quantity of labour employed.

Question 49

The response of output following a natural disaster includes

A)a decrease in output demand and an increase in output supply.
B)a decrease in output demand and a decrease in output supply.
C)only a decrease in output demand.
D)an increase in output demand and an increase in output supply.
E)an increase in output demand and a decrease in output supply.

Question 50

Optimal investment is

A)negatively related with the real interest rate.
B)unrelated to the real interest rate.
C)determined by current stock prices.
D)positively related with the real interest rate.
E)positively related with the depreciation rate.

Question 51

Question 52

When drawn against current income, the slope of the marginal

A)product of labour.
B)propensity to save.
C)benefit from investment.
D)product of capital.
E)propensity to consume.

Question 53

Question 54

Next period's capital is equal to current-period investment

A)minus the amount of current period depreciation.
B)plus the amount of current period depreciation.
C)plus the amount of current capital left over after depreciation.
D)minus the amount of current capital left over after depreciation.
E)plus the amount of current capital left over.

Question 55

The output demand curve shows the

A)positive relationship between total factor productivity and current aggregate output.
B)positive relationship between the real interest rate and current aggregate output.
C)negative relationship between the real interest rate and current aggregate output.
D)negative relationship between the wage rate and current aggregate output.
E)positive relationship between the wage rate and current aggregate output.

Question 56

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

A)substitution effect dominates the income effect.
B)income effect dominates the substitution effect.
C)income effect and substitution effects are equal.
D)representative consumer is a lender.
E)representative consumer is a borrower.

Question 57

The equilibrium effects of a temporary increase in total factor productivity include

A)only a decrease in the real interest rate.
B)an increase in the real wage and an increase in the real interest rate.
C)a decrease in the real wage and a decrease in the real interest rate.
D)an increase in the real wage and a decrease in the real interest rate.
E)a decrease in the real wage and an increase in the real interest rate.

Question 58

A)future consumption-savings decision.
B)current period work-leisure decision.
C)investment decision.
D)future period work-leisure decision.
E)current consumption-savings decision.

Question 59

When drawn against the real interest rate, the output demand curve unambiguously shifts to the right if either or both of the following occur.

A)a decrease in current taxes and a decrease in future taxes
B)an increase in current taxes and a reduction in interest rates
C)an increase in current taxes and an increase in future taxes
D)a decrease in current taxes and an increase in future taxes
E)an increase in current taxes and a decrease in future taxes

Question 60

Question 61

An increase in total factor productivity causes the

A)production function to shift up, labour demand to shift right, and output supply to shift right.
B)production function to shift down, labour demand to shift left, and output supply to shift left.
C)production function to shift down, labour demand to shift right, and output supply to shift right.
D)production function to shift up, labour demand to shift right, and output supply to shift left.
E)production function to shift up, labour demand to shift left, and output supply to shift right.

Question 62

A key determinant of investment is

A)the level of government spending.
B)the level of economic activity.
C)the expected rate of future total factor productivity.
D)the real interest rate.
E)the potential for exports.

Question 63

A consumer may increase his or her saving by

A)working more hours and consuming fewer goods in the present period.
B)working more hours and consuming more goods in the present period.
C)working fewer hours and consuming fewer goods in the present period.
D)working fewer hours and consuming more goods in the present period.
E)working more hours and paying less taxes in the present period.

Question 64

The demand for current consumption, as plotted against current income, shifts to the right due

A)an increase in future taxes.
B)a decrease in interest rates.
C)an increase in current income.
D)a increase in current taxes.
E)a decrease in future income.

Question 65

If a bubble occurs in the housing market, then

A)Output falls.
B)The real interest rate falls.
C)Employment falls.
D)The real wage falls.
E)The output supply curve shifts to the right.

Question 66

Which one of the following is a key determinant of aggregate economic activity in the present?

A)social security developments
B)news about future incomes
C)future taxes
D)future government spending
E)expectations about future monetary policy

Question 67

What are three factors that determine current labour supply?

Question 68

When there is a temporary increase in total factor productivity

A)labour demand decreases and output demand increases.
B)labour demand increases and output supply increases.
C)labour demand decreases and output supply decreases.
D)labour demand increases and output supply decreases.
E)labour demand increases and output demand increases.

Question 69

When drawn against the real interest rate, the optimal investment schedule shifts to the right if

A)future total factor productivity z' decreases.
B)future total factor productivity z' remains constant.
C)current total factor productivity z decreases.
D)future total factor productivity z' increases.
E)current total factor productivity z increases.

Question 70

How many of the following business cycle facts can be explained if the primary cause of business cycles is temporary changes in total factor productivity: procyclical consumption, procyclical
Investment, procyclical employment, and procyclical real wages?

A)one
B)two
C)three
D)four
E)none

Question 71

When drawn against the real interest rate, the output demand curve shifts to the right when

A)future taxes increase.
B)the real interest rate increases.
C)both future and current taxes increase.
D)future income increases.
E)the real interest rate decreases.