Question 1

For the economy as a whole,investment represents a tradeoff between
A) real interest rates and GDP.
B) government spending and issuing debt.
C) present and future consumption.
D) savings and investment.
E) interest rates and taxes.

Accepted Answer

Investment involves sacrificing present consumption in order to increase future production and consumption. Therefore, it represents a tradeoff between present and future consumption. Choices A, B, D, and E are not directly related to investment tradeoffs.

Question 2

A consumer may increase his or her saving by
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.

Accepted Answer

If the consumer works more hours and consumes fewer goods in the present period, they will have more income available to save. Choosing to work fewer hours or consume more goods will decrease the amount of income available for saving. Paying less taxes may also increase disposable income, but it is not one of the options listed in this question.

Question 3

The slope of the demand for consumption goods is
A) greater than 1.
B) equal to 1.
C) the MPC.
D) the MRS.
E) equal to the wage rate.

Accepted Answer

The slope of the demand for consumption goods is commonly referred to as the marginal propensity to consume (MPC) in economics. It represents the change in consumption for every one unit change in income. Therefore, the slope of the demand for consumption goods is equal to the MPC.

Question 4

Next period's capital is equal to current-period investment
A) plus the amount of current capital left over after depreciation.
B) minus the amount of current capital left over after depreciation.
C) plus the amount of current period depreciation.
D) minus the amount of current period depreciation.
E) plus the amount of current capital left over.

Accepted Answer

Next period's capital is calculated by adding the current-period investment to the remaining capital after accounting for depreciation.

Question 5

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

Accepted Answer

An increase in the real interest rate makes saving more attractive, leading individuals to work more to take advantage of higher returns on savings, thus shifting the current labour supply curve to the right.

Question 6

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

Accepted Answer

The real interest rate is a key determinant of investment because it affects the cost of borrowing and the return on investment. A higher real interest rate makes borrowing more expensive, which reduces investment. Similarly, a higher real interest rate increases the opportunity cost of investing, making other options more attractive. On the other hand, a lower real interest rate makes borrowing cheaper and increases the return on investment, which stimulates investment.

Question 7

The condition  = w describes the representative consumer's
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.

Accepted Answer

The answer of The condition  = w describes the...

Question 8

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

Accepted Answer

The marginal rate of substitution of future leisure for future consumption is equal to the future real wage, as it reflects the trade-off between leisure and consumption in the future period.

Question 9

Any increase in the present value of taxes for the consumer implies
A) an increase in lifetime wealth and an increase in current labour supply.
B) an increase in lifetime wealth and a decrease in current labour supply.
C) a decrease in lifetime wealth and an increase in current labour supply.
D) a decrease in lifetime wealth and a decrease in current labour supply.
E) a decrease in lifetime wealth and a decrease in current consumption demand.

Accepted Answer

An increase in the present value of taxes reduces lifetime wealth, prompting consumers to work more currently to maintain their consumption levels, thus increasing current labor supply.

Question 10

The representative consumer's current labour supply curve slopes upward under the assumption that
A) there is an indirect relationship between the current real wage and current labour supply.
B) the substitution effect of an increase in the real wage outweighs the income effect.
C) the substitution effect of an increase in the real wage is less than the income effect.
D) the substitution effect of an increase in the current labour supply outweighs the income effect.
E) the substitution effect of an increase in the current labour supply is less than the income effect.

Accepted Answer

The upward sloping labour supply curve indicates that the substitution effect of an increase in the real wage (i.e. the incentive to work more due to the higher wage) outweighs the income effect (i.e. the incentive to work less due to the higher income). This assumption implies that the consumer is willing to sacrifice some leisure time to earn more income at a higher wage rate.

Question 11

The condition  = 1 + r describes the representative consumer's
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.

Accepted Answer

The answer of The condition  = 1 + r...

Question 12

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

Accepted Answer

The substitution effect suggests that as real wages increase, the opportunity cost of leisure rises, leading individuals to supply more labor. This effect dominates the income effect in the short run, where individuals are more likely to respond to wage changes by adjusting their labor supply.

Question 13

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

Accepted Answer

An increase in lifetime wealth typically leads individuals to work less, as they can maintain their desired standard of living with less income from labor, thus shifting the current labor supply curve to the left.

Question 14

The firm will hire current labour until
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.

Accepted Answer

The firm will hire workers until the marginal product of labour equals the wage rate, as this indicates that the additional output generated by hiring another worker is equal to the cost of paying that worker. This is the point of profit maximization for the firm.

Question 15

The condition  = w' describes the representative consumer's
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.

Accepted Answer

The answer of The condition  = w' describes the...

Question 16

The demand for current consumption,as plotted against current income,shifts to the right due to
A) a increase in current taxes.
B) an increase in future taxes.
C) an increase in current income.
D) a decrease in future income.
E) a decrease in interest rates.

Accepted Answer

An increase in current income leads to an increase in disposable income, which in turn leads to an increase in current consumption. This causes the demand curve for current consumption to shift to the right.

Question 17

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

Accepted Answer

According to the substitution effect, an increase in the real interest rate leads to a higher opportunity cost of current consumption and therefore a decrease in consumption demand. According to the income effect, an increase in the real interest rate leads to a higher return on savings, which increases the consumer's ability to consume goods in the future, leading to an increase in consumption demand. The assumption that current-period consumption demand is negatively related to the real interest rate is justified when the substitution effect dominates the income effect. Therefore, the correct answer is B.

Question 18

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

Accepted Answer

When the real interest rate increases, it becomes more expensive to borrow money and therefore the incentive to save and postpone consumption also increases. As a result, the demand for current consumption shifts down.

Question 19

An increase in lifetime wealth is likely to
A) increase current labour supply and increase current consumption demand.
B) increase current labour supply and decrease current consumption demand.
C) decrease current labour supply and increase current leisure.
D) decrease current labour supply and decrease current consumption demand.
E) decrease current labour supply and decrease current leisure.

Accepted Answer

An increase in lifetime wealth typically allows individuals to afford more leisure, thus reducing their current labor supply, while increasing their consumption of leisure activities.

Question 20

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

Accepted Answer

The intertemporal substitution of leisure effect suggests that when the real interest rate increases, individuals are incentivized to work more in the present to take advantage of higher future consumption possibilities, thus increasing current labor supply.

Quiz 11: A Real Intertemporal Model with Investment

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

A consumer may increase his or her saving by

The slope of the demand for consumption goods is

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

An increase in the real interest rate

A key determinant of investment is

The condition = w describes the representative consumer's

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

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

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

The condition = 1 + r describes the representative consumer's

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

An increase in lifetime wealth

The firm will hire current labour until

The condition = w' describes the representative consumer's

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

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

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

An increase in lifetime wealth is likely to

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