Question 1

A consumption function shows the relationship between consumption and:

Accepted Answer

The consumption function shows the relationship between consumption and disposable income, as disposable income represents the amount of income that households have to spend on consumption after taxes and transfers. The relationship between consumption and personal income may include factors such as savings, while the relationship with taxes is indirect through disposable income.

Question 2

Total investment in the United States averages about percent of GDP.

Accepted Answer

The answer of Total investment in the United States averages...

Question 3

When economists speak of "the" interest rate, they mean:

Accepted Answer

When economists speak of "the" interest rate, they generally mean the overall trend or direction of interest rates in the economy, taking into account a variety of rates such as mortgage rates, corporate bond rates, and government bond rates. Therefore, there is no specific interest rate that can be identified as "the" interest rate.

Question 4

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 0 1
Is 5,000. If t decreases from 0.3 to 0.2, then consumption increases by:
1

Accepted Answer

When t decreases from 0.3 to 0.2, the disposable income (Y - T) increases, leading to an increase in consumption. The change in taxes is 0.1 * 5000 = 500. The marginal propensity to consume is 0.85, so the increase in consumption is 0.85 * 500 = 425.

Question 5

The government spending component of GDP includes all of the following except:

Accepted Answer

The government spending component of GDP includes federal and state and local spending on goods and services, but transfer payments such as Social Security benefits and unemployment insurance are not included as they represent transfers of income rather than purchases of goods and services.

Question 6

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.

Question 7

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

Accepted Answer

Savings is the part of income not consumed. If Y increases by 1 unit, consumption increases by 0.85 units (0.85Y), so savings increase by the remaining 0.15 units.

Question 8

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

Accepted Answer

The coefficient of Y in the consumption function is 0.85. This means that for every 1 unit increase in Y, C will increase by 0.85 units. Therefore, if Y increases by 1 unit, C will increase by 0.85 units.

Question 9

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 0 1
T increases by 1 unit, then consumption:
0

Accepted Answer

When T increases by 1 unit, disposable income (Y - T) decreases by 1 unit, leading to a decrease in consumption by 0.85 units due to the marginal propensity to consume of 0.85.

Question 10

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

Accepted Answer

To find C, we need to substitute Y from the production function into the consumption function: C = 500 + 0.5Y C = 500 + 0.5(50K^0.5L^0.5) C = 500 + 25K^0.5L^0.5 Substituting K = 100 and L = 100, we get: C = 500 + 25(100^0.5100^0.5) C = 500 + 25(100) C = 3,000 Therefore, the answer is C.

Question 11

If government purchases exceed taxes minus transfer payments, then the government budget is:

Accepted Answer

If government purchases exceed taxes minus transfer payments, it means the government is spending more than it is receiving from revenues and transfers, leading to a budget deficit.

Question 12

Assume that a firm wants to build a factory that will cost $5 million. It believes that it can get a return of $600,000 in one year and then can sell the used factory for its original cost. The rate of return on this investment would be:

Accepted Answer

The rate of return can be calculated using the formula:
Rate of return = (Gain from investment - Cost of investment) / Cost of investment

In this case, the gain from investment is the return of $600,000 and the cost of investment is $5,000,000. If the factory is sold for its original cost, then there is no gain or loss on the sale.

Rate of return = ($600,000 - $5,000,000) / $5,000,000 = -0.88

The negative rate of return indicates that the investment would result in a loss. However, if we use the initial cost of the factory (not considering the return and resale value), the rate of return would be:

Rate of return = ($600,000 / $5,000,000) = 0.12 or 12%

Therefore, the best choice is B.

Question 13

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

To calculate the real rate of interest, we subtract the inflation rate from the nominal rate of interest:
Real rate of interest = Nominal rate of interest - Inflation rate
= 10% - 2%
= 8%
Now, we can use the investment function to find the level of investment:
I = 1,000 - 30r
= 1,000 - 30(8)
= 1,000 - 240
= 760
Therefore, the level of investment will be $760. The best choice is C.

Question 14

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

Accepted Answer

The investment function slopes downward because as the interest rate decreases, there are more investment projects that become profitable, leading to an increase in investment. Conversely, as the interest rate increases, fewer investment projects are profitable, leading to a decrease in investment.

Question 15

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 1 Y = 50K^0.5L^0.5, where K = 100 and L = 100. If t increases from 0.2 to 0.25, then consumption decreases by: 1

Accepted Answer

Substituting the given values in the tax function, we have:
T = 100 + tY
T = 100 + 0.25(50K + 5S + 0L)
T = 100 + 12.5K + 1.25S + 0
T = 212.5
Substituting the value of Y and T in the consumption function, we have:
C = 200 + 0.7(Y - T)
C = 200 + 0.7(50K + 5S + 0L - 212.5)
C = 200 + 35K + 3.5S - 148.75
C = 35K + 3.5S + 51.25
Now, if t increases from 0.2 to 0.25, the value of T will increase from 187.5 to 212.5. 
Substituting the new value of T in the consumption function, we have:
C = 35K + 3.5S + 51.25 + 0.7(50K + 5S + 0L - 212.5) 
C = 35K + 3.5S + 51.25 + 0.7(50K + 5S - 212.5) 
C = 35K + 3.5S + 51.25 + 0.7(50K + 5S - 212.5) 
C = 35K + 3.5S + 51.25 + 24.5K + 2.45S - 148.75
C = 59.5K + 5.95S - 97.5
The decrease in consumption is:
New Consumption - Old Consumption
(59.5K + 5.95S - 97.5) - (35K + 3.5S + 51.25)
24.5K + 2.45S - 148.75
= 24.5(100) + 2.45(100) - 148.75
= 2450 - 148.75
= 2301.25
Therefore, consumption decreases by $2,301.25, which is closest to option C: 175.

Question 16

Other things equal, an increase in the interest rate leads to:

Accepted Answer

When interest rates increase, the cost of borrowing money also increases. This makes it more expensive for firms to finance investment projects, leading to a decrease in the quantity of investment goods demanded. Conversely, when interest rates fall, borrowing costs decrease, and investment spending tends to increase.

Question 17

Consumption depends positively on and investment depends negatively on .

Accepted Answer

The consumption function indicates that as disposable income increases, consumption also increases. This is because households have more money available to spend on goods and services. On the other hand, investment depends negatively on the real interest rate. When the real interest rate increases, it becomes more expensive for firms to borrow money to invest in new projects, thus reducing investment.

Question 18

All of the following actions increase government purchases of goods and services except the:

Accepted Answer

Sending a Social Security check to Betty Jones is a transfer payment and is not considered a purchase of goods and services by the government.

Question 19

Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides that it should:

Accepted Answer

The answer of Assume that a firm is considering building...

Question 20

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

Accepted Answer

Solving for savings:
S = Y - C
S = Y - (150 + 0.85(Y - T))
S = Y - 150 - 0.85Y + 0.85T
S = 0.15Y - 0.85T - 150

If T increases by 1 unit:
S = 0.15Y - 0.85(T+1) - 150
S = 0.15Y - 0.85T - 1.7 - 150
S = 0.15Y - 0.85T - 151.7

Savings decreases by 0.85 units.

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

A consumption function shows the relationship between consumption and:

Total investment in the United States averages about percent of GDP.

When economists speak of "the" interest rate, they mean:

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 0 1 Is 5,000. If t decreases from 0.3 to 0.2, then consumption increases by: 1

The government spending component of GDP includes all of the following except:

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:

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

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

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 0 1 T increases by 1 unit, then consumption: 0

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

If government purchases exceed taxes minus transfer payments, then the government budget is:

Assume that a firm wants to build a factory that will cost $5 million. It believes that it can get a return of $600,000 in one year and then can sell the used factory for its original cost. The rate of return on this investment would be:

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:

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

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 1 Y = 50K^0.5L^0.5, where K = 100 and L = 100. If t increases from 0.2 to 0.25, then consumption decreases by: 1

Other things equal, an increase in the interest rate leads to:

Consumption depends positively on and investment depends negatively on .

All of the following actions increase government purchases of goods and services except the:

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

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

A consumption function shows the relationship between consumption and:

Total investment in the United States averages about percent of GDP.

When economists speak of "the" interest rate, they mean:

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 0 1 Is 5,000. If t decreases from 0.3 to 0.2, then consumption increases by: 1

The government spending component of GDP includes all of the following except:

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:

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

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

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 0 1 T increases by 1 unit, then consumption: 0

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:

If government purchases exceed taxes minus transfer payments, then the government budget is:

Assume that a firm wants to build a factory that will cost $5 million. It believes that it can get a return of $600,000 in one year and then can sell the used factory for its original cost. The rate of return on this investment would be:

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:

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

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 1 Y = 50K0.5L0.5, where K = 100 and L = 100. If t increases from 0.2 to 0.25, then consumption decreases by: 1

Other things equal, an increase in the interest rate leads to:

Consumption depends positively on and investment depends negatively on .

All of the following actions increase government purchases of goods and services except the:

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

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

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 1 Y = 50K^0.5L^0.5, where K = 100 and L = 100. If t increases from 0.2 to 0.25, then consumption decreases by: 1