Question 1

Assume that the government levies a one-time-only tax on oil companies equal to a proportion of the value of the company's oil reserves. According to the neoclassical model, if firms face no financing constraints and also believe the tax will not be repeated, the effect of this tax on investment by these firms will be to:

Accepted Answer

According to the neoclassical model, a one-time tax on oil reserves will not affect investment decisions by firms if they face no financing constraints and believe the tax will not be repeated. This is because the tax is a sunk cost and does not affect the marginal benefit and cost of investing in new projects. Therefore, the firms will continue to invest as long as the expected return on investment exceeds the cost of capital.

Question 2

According to Keynes, what is the relationship between average propensity to consume and income? What was his reasoning?

Accepted Answer

The answer of According to Keynes, what is the relationship...

Question 3

Suppose it is an election year and the economy is in a recession. The opposition candidate proposes an investment tax credit to take effect next year after she takes office. If the public believes the opposition candidate has a good chance of winning, the effect of this promise will likely be to:

Accepted Answer

If the public believes the opposition candidate will win and implement the investment tax credit next year, firms may delay investment until the credit is available, decreasing investment this year and increasing it next year.

Question 4

Assume that a car-rental company buys cars for $20,000 each and rents them out to other businesses. The company faces a nominal interest rate of 10 percent per year, and car prices are rising at 6 percent per year. If cars depreciate at 30 percent per year, what will be the company's cost of capital per car?

Accepted Answer

The answer of Assume that a car-rental company buys cars...

Question 5

Use the neoclassical model of business fixed investment to illustrate graphically how a plague that kills a large proportion of the labour force would change the rental price of capital. If other factors remained unchanged, how would this change the quantity of investment in the economy?

Accepted Answer

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Question 6

List the three key properties of Keynes's consumption functions.

Accepted Answer

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Question 7

According to Hall, consumption spending follows a random walk.
a.What determines changes in consumption in this case?
b.What is the implication of following a random walk for predicting changes in consumption?

Accepted Answer

The answer of According to Hall, consumption spending follows a...

Question 8

During recessions, investment spending usually decreases because:

Accepted Answer

During recessions, profits usually decrease for firms, leading to more firms facing financing constraints. This means that they are less likely to invest in capital expenditures, which decreases investment spending. The other choices are not necessarily true during recessions; the real interest rate may fall, but this does not always lead to decreased investment spending, and the purchase price of capital may also decrease, but this may not be enough to overcome financing constraints. Corporate tax rates may decrease, but this is not a primary factor affecting investment spending during recessions.

Question 9

Assume that Andrew Marcus is 25 years old and expects to live to age 75.
a.If he wins $20 million in cash (after taxes) in the lottery and retires, how much will he consume each year if he wants to have constant consumption and use up all his wealth by the time he dies? Assume the real interest rate is zero.
b.If his total income in the year he wins the lottery is his lottery winnings, what will his average propensity to consume (APC) be for that year?
c.If he has no other earnings in later years but continues his constant consumption, what will his average propensity to consume be for those later years?
d.What is Andrew's "permanent income" in the year he wins the lottery? What is his "transitory income"?

Accepted Answer

The answer of Assume that Andrew Marcus is 25 years...

Question 10

What variables, in addition to current income, are hypothesized to influence consumption in the:
a.life-cycle model?
b.permanent-income hypothesis?
c.random-walk hypothesis?

Accepted Answer

The answer of What variables, in addition to current income,...

Question 11

If real interest rates increase, what will happen to business fixed investment?

Accepted Answer

The answer of If real interest rates increase, what will...

Question 12

The data indicate that the elderly do not dissave as much as the life-cycle model predicts. Explain why this may be the case?

Accepted Answer

The answer of The data indicate that the elderly do...

Question 13

How do changes in wealth shift the consumption function in the long run?

Accepted Answer

The answer of How do changes in wealth shift the...

Question 14

According to the neoclassical model of investment, the immediate impact of an earthquake that destroys part of the capital stock will be to:

Accepted Answer

According to the neoclassical model, the destruction of part of the capital stock will reduce the supply of capital, which will cause an increase in the rental price of capital. To maintain the desired level of capital stock, firms will increase their investment. However, the cost of capital will not necessarily increase, as it depends on the interest rate and the elasticity of substitution between capital and other factors of production. Therefore, the correct answer is B, which states that the rental price of capital and the rate of investment will increase, but the cost of capital will be left unchanged.

Question 15

What is the impact on current consumption of a temporary tax cut according to:
a.the Keynesian consumption function?
b.the permanent-income hypothesis?

Accepted Answer

The answer of What is the impact on current consumption...

Question 16

The distinction between current income and expected future income is a critical distinction among the six theories of consumption. Which theories place greater emphasis on current income, and which theories place greater emphasis on future expected income? Why does this distinction matter for economic policymakers?

Accepted Answer

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Question 17

Why did Keynes's conjectures hold up well in the studies of household data and short time-series but fail when long time-series were examined?

Accepted Answer

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Question 18

Use the neoclassical model of business fixed investment to illustrate graphically how a hurricane that destroys a large amount of capital (holding other factors constant) would change the rental price of capital. If other factors remained unchanged, how would this change the quantity of investment spending in the economy?

Accepted Answer

The answer of Use the neoclassical model of business fixed...

Question 19

Some taxpayers voluntarily have more taxes withheld from their paycheques during the year in order to receive a large tax refund once a year. These taxpayers give the government an interest-free loan and lose the interest they could have earned by saving a portion of the larger paycheques they would have received during the year. Why might a person make this choice? What does this choice say about the theory of the consumption function?

Accepted Answer

The answer of Some taxpayers voluntarily have more taxes withheld...

Question 20

How will a decrease in output during a recession affect business fixed investment?

Accepted Answer

The answer of How will a decrease in output during...

Quiz 19: The Microfoundations of Consumption and Investment