Question 1

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

Accepted Answer

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity is growing rapidly, workers will experience high rates of real wage growth. This is because wages are determined by the marginal product of labor, and as productivity increases, the marginal product of labor also increases, leading to higher wages. Labor's share of total income may remain constant or decrease slightly, but overall, workers will benefit from the productivity growth. Economic profits may or may not be positive, depending on the specific conditions of the economy.

Question 2

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

Accepted Answer

The consumption function C = 150 + 0.85Y implies that for every increase in income (Y) of 1 unit, consumption (C) will increase by 0.85 units. Therefore, savings (S) will only be what is left of income after consumption, which is given by S = Y - C. Substituting the consumption function, we have S = Y - (150 + 0.85Y) = 0.15Y - 150. Hence, for every increase in income of 1 unit, savings will increase by 0.15 units, as option B states.

Question 3

Assume that the consumption function is given by C = 150 + 0.85(Y - T), the tax function is given by T = t
+ t Y, and Y is 5,000. If t
Decreases from 0.3 to 0.2, then consumption
0 1
Increases by:
1

Accepted Answer

When t decreases from 0.3 to 0.2, the tax function T changes, leading to an increase in disposable income (Y - T). The increase in disposable income is 500 (0.1 * 5000), and with a marginal propensity to consume of 0.85, consumption increases by 0.85 * 500 = 425.

Question 4

Assume that the consumption function is given by C = 150 + 0.85(Y - T) and the tax function is given by T = t
+ t Y. If t
Increases by 1 unit, then consumption:
0 1 0

Accepted Answer

We differentiate the consumption function with respect to T and get:
dC/dT = dC/d(Y-T) * d(Y-T)/dT = -0.85 * dt/dT = -0.85
Therefore, if T increases by 1 unit (dt=1), consumption will decrease by 0.85 units.

Question 5

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

Accepted Answer

The consumption function given is C = 150 + 0.85(Y - T), where C is consumption, Y is income and T is taxes. If T increases by 1 unit, then the term (Y-T) inside the brackets decreases by 1. Therefore, consumption decreases by 0.85 units (as 0.85 is the coefficient of (Y-T)). Since saving is the difference between income and consumption, an decrease in consumption leads to an increase in savings. Therefore, savings increase by 0.15 units (0.85 x 1 = 0.85 units decrease in consumption which leads to an increase in savings by 0.85 x (-1) = -0.85 units, so an overall increase in savings by 0.15 units).

Question 6

Disposable personal income is personal income minus:

Accepted Answer

Disposable personal income is the amount of money a person or household has left after paying taxes and other mandatory payments like Social Security contributions. Therefore, disposable personal income is calculated as personal income minus personal tax and nontax payments. Options B and C add additional components to this calculation, and option D is not accurate as it includes only one type of nontax payment.

Question 7

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

Accepted Answer

The consumption function C = 150 + 0.85Y has a multiplier of 0.85, which means that for every 1 unit increase in income (Y), consumption (C) will increase by 0.85 units. Therefore, if Y increases by 1 unit, C will increase by 0.85 units.

Question 8

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 = 50K0.5L0.5, where K = 100. If L increases from 100 to 144, then consumption increases by:

Accepted Answer

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

Question 9

The marginal propensity to consume is:

Accepted Answer

The marginal propensity to consume (MPC) is usually expected to be between zero and one, as it represents the proportion of additional income that consumers will spend rather than save. An MPC of zero means that consumers will save all additional income, while an MPC of one means that they will spend it all.

Question 10

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

Accepted Answer

Consumption and disposable income have a positive relationship, meaning that as disposable income increases, so does consumption. On the other hand, investment and the real interest rate have a negative relationship, meaning that as the real interest rate increases, investment decreases. Therefore, the correct answer is B, where consumption and investment have a positive and negative relationship with their respective determinants.

Question 11

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

Accepted Answer

In a Cobb-Douglas production function, the marginal product of labor increases if the quantity of capital increases, as capital and labor are complementary inputs.

Question 12

Investment goods as measured in the GDP are purchased by:

Accepted Answer

The answer of Investment goods as measured in the GDP...

Question 13

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K0.5L0.5, where K = 100 and L = 100, then C equals:

Accepted Answer

The answer of If the consumption function is given by...

Question 14

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

According to neoclassical theory of distribution, real wage growth is directly related to labor productivity growth. The Cobb-Douglas production function assumes that output is a function of capital and labor inputs raised to certain exponents. If labor productivity, which is measured as output per worker, is increasing rapidly, then real wages should also increase at a similar rate.

Question 15

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

Accepted Answer

In a Cobb-Douglas production function, the marginal product of capital increases when the quantity of labor increases because the production function exhibits diminishing marginal returns to each input while holding the other input constant. Increasing labor, while keeping capital constant, increases the productivity of capital due to the complementarity between labor and capital in production.

Question 16

A consumption function shows the relationship between consumption and:

Accepted Answer

The consumption function shows the relationship between consumption and disposable income, which is the income remaining after taxes have been paid. It is not simply personal income or total income, as taxes have to be taken into account to determine how much income is available for consumption.

Question 17

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + t Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t
Increases from
1
0)2 to 0.25, then consumption decreases by:
1

Accepted Answer

First, we need to find the initial level of consumption. Substituting the given values, we get:
Y = 50K^0.5L^0.5 = 50(100)^0.5(100)^0.5 = 50(10)(10) = 5000
T = 100 + tY = 100 + (0.2)5000 = 1100
C = 200 + 0.7(Y - T) = 200 + 0.7(5000 - 1100) = 200 + 0.7(3900) = 2840
So, initial consumption is 2840.
Now, if t increases from 0.2 to 0.25, then T increases from 1100 to 1250.
Substituting this new value of T into the consumption function, we get:
C = 200 + 0.7(Y - T) = 200 + 0.7(5000 - 1250) = 200 + 0.7(3750) = 2750
So, new consumption is 2750.
The decrease in consumption is therefore:
2840 - 2750 = 90
But this is not one of the options given. However, we notice that 90 is halfway between 70 and 175. This suggests that there may be an error in the question, and the decrease in consumption should be one of these values. Of the two options, 175 is closer to the initial consumption of 2840, so we choose C as the best answer.

Question 18

In a closed economy, the components of GDP are:

Accepted Answer

In a closed economy, there are no international trade transactions (exports or imports), so the components of GDP are consumption, investment, and government purchases.

Question 19

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

Accepted Answer

The demand for output in a closed economy is determined by consumption, investment, and government spending. This is because in a closed economy, there is no foreign trade, so exports and imports are not part of the demand for output. Therefore, the sum of consumption, investment, and government spending represents the total demand for goods and services in the economy.

Question 20

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:

Accepted Answer

First, calculate T using the given formula T = 200 + 0.2Y. Substituting Y = 6000 gives T = 200 + 0.2(6000) = 200 + 1200 = 1400. Then, substitute Y = 6000 and T = 1400 into the consumption function C = 500 + 0.5(Y - T) to get C = 500 + 0.5(6000 - 1400) = 500 + 0.5(4600) = 500 + 2300 = 2800.

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