Question 1

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wages of:
A)both barbers and farmers should have remained constant over time.
B)both barbers and farmers should have risen over time.
C)farmers should have risen while the real wage of barbers should have remained constant.
D)barbers should have risen while the real wage of farmers should have remained constant.

Accepted Answer

According to the neoclassical theory of distribution, technological progress leads to an increase in productivity and an increase in real wages for all workers, including both farmers and barbers. Therefore, option B is the correct answer.

Question 2

Exhibit: Saving, Investment, and the Interest Rate 1 The economy begins in equilibrium at point E, representing the real interest rate r₁ at which saving S₁ equals desired investment I₁. What will be the new equilibrium combination of real interest rate, saving, and investment if the government raises taxes, holding other factors constant? A)point A B)point B C)point C D)point D

Accepted Answer

The answer of Exhibit: Saving, Investment, and the Interest Rate...

Question 3

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, investment:
A)rises by $100 billion.
B)rises by $60 billion.
C)falls by $60 billion.
D)falls by $100 billion.

Accepted Answer

The increase in lump-sum taxes leads to a decrease in disposable income, which in turn decreases consumption spending. The MPC is 0.6, so consumption spending will decrease by $60 billion (0.6 x $100 billion). In the short run, investment is assumed to be fixed, so it does not change. Therefore, in order for output to remain constant, net exports must increase by $60 billion (equal to the decrease in consumption spending). Since net exports are equal to exports minus imports, this implies an increase in exports or a decrease in imports, which is not specified in the question.

Question 4

Exhibit: Saving, Investment, and the Interest Rate 2 The economy begins in equilibrium at point E, representing the real interest rate r₁ at which saving S₁ equals desired investment I₁. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods? A)point A B)point B C)point C D)point D

Accepted Answer

The answer of Exhibit: Saving, Investment, and the Interest Rate...

Question 5

When there is a fixed supply of loanable funds, an increase in investment demand results in:
A)a higher interest rate.
B)a lower interest rate.
C)an increase in investment.
D)a decrease in investment.

Accepted Answer

When there is a fixed supply of loanable funds, an increase in investment demand leads to a higher interest rate as borrowers compete for the limited funds.

Question 6

When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a _____ interest rate and _____ in the quantity of investment.
A)higher; no change
B)higher; an increase
C)lower; no change
D)lower; an increase

Accepted Answer

When saving increases as the interest rate increases, it indicates a positively sloped supply curve for loanable funds. An increase in investment demand will shift the demand curve to the right. This leads to a new equilibrium point with a higher interest rate and higher quantity of investment, as the demand for funds has increased while the supply remains unchanged. Therefore, the correct answer is B.

Question 7

An example of increasing returns to scale is when capital and labour inputs:
A)both increase 10 percent and output increases 5 percent.
B)both increase 10 percent and output increases 10 percent.
C)both increase 5 percent and output increases 10 percent.
D)do not change and output decreases 5 percent.

Accepted Answer

Increasing returns to scale occur when the percentage increase in output is greater than the percentage increase in inputs. In option C, inputs increase by 5% and output increases by 10%, indicating increasing returns to scale.

Question 8

If increased immigration raises the labour force, the neoclassical theory of distribution predicts that:
A)the real wage will rise, and the real rental price of capital will fall.
B)both the real wage and the real rental price of capital will fall.
C)both the real wage and the real rental price of capital will rise.
D)the real wage will fall, and the real rental price of capital will rise.

Accepted Answer

According to the neoclassical theory of distribution, an increase in the labor force leads to a decrease in the real wage due to the higher supply of labor, while the real rental price of capital rises as capital becomes relatively scarcer compared to labor.

Question 9

Suppose that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.5(Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate, in percent. Government spending (G) is 1,000, and taxes (T) is also 1,000. When a technological innovation changes the investment function to I = 3,000 - 100r:
A)I rises by 1,000 and r rises by 10 percentage points.
B)I rises by 1,000 and r is unchanged.
C)I is unchanged and r rises by 10 percentage points.
D)I is unchanged and r rises by 15 percentage points.

Accepted Answer

The answer of Suppose that GDP (Y) is 5,000. Consumption...

Question 10

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given level of disposable income. This shift, in a neoclassical economy, will:
A)lower investment and raise the interest rate.
B)raise investment and lower the interest rate.
C)lower both investment and the interest rate.
D)raise both investment and the interest rate.

Accepted Answer

In a neoclassical economy, an increase in consumer confidence leads to higher current consumption, reducing savings. This decrease in savings raises the interest rate, which in turn lowers investment.

Question 11

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, national saving:
A)rises by $100 billion.
B)rises by $60 billion.
C)falls by $60 billion.
D)falls by $100 billion.

Accepted Answer

When the government raises lump-sum taxes on income by $100 billion and the neoclassical economy adjusts so that output does not change, national saving will rise. The increase in taxes reduces disposable income, resulting in a decrease in consumption by 0.6 times the amount of the tax increase, which is $60 billion. Since savings is the difference between disposable income and consumption, it will increase by $100 billion (the tax increase) minus $60 billion (the decrease in consumption), which equals $40 billion. Therefore, national saving will rise by $40 billion.

Question 12

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts that:
A)the real wage will rise, and the real rental price of capital will fall.
B)both the real wage and the real rental price of capital will fall.
C)both the real wage and the real rental price of capital will rise.
D)the real wage will fall, and the real rental price of capital will rise.

Accepted Answer

According to the neoclassical theory of distribution, if the capital stock decreases, the marginal product of labor decreases, leading to a fall in real wages. Conversely, the marginal product of capital increases, leading to a rise in the real rental price of capital.

Question 13

If a technological advancement increases productivity, the neoclassical theory of distribution predicts that:
A)the real wage will rise, and the real rental price of capital will fall.
B)both the real wage and the real rental price of capital will fall.
C)both the real wage and the real rental price of capital will rise.
D)the real wage will fall, and the real rental price of capital will rise.

Accepted Answer

According to the neoclassical theory of distribution, a technological advancement that increases productivity will lead to an increase in both the real wage and the real rental price of capital, as both labor and capital become more productive and valuable.

Question 14

Exhibit: Saving, Investment, and the Interest Rate 2 The economy begins in equilibrium at point E, representing the real interest rate r₁ at which saving S₁ equals desired investment I₁. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy)? A)point A B)point B C)point C D)point D

Accepted Answer

The answer of Exhibit: Saving, Investment, and the Interest Rate...

Question 15

In a neoclassical economy, assume that the government lowers both government spending and taxes by $100 billion. If the marginal propensity to consume is 0.6, investment will:
A)rise by $100 billion.
B)rise by $60 billion.
C)rise by $40 billion.
D)not change.

Accepted Answer

The answer of In a neoclassical economy, assume that the...

Question 16

In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. This causes:
A)investment to fall and the interest rate to rise.
B)investment to rise and the interest rate to fall.
C)investment and the interest rate to both fall.
D)investment and the interest rate to both rise.

Accepted Answer

In a neoclassical economy, lowering both government spending and taxes by the same amount is a balanced budget change, which typically leads to a decrease in the interest rate due to reduced government borrowing. This lower interest rate encourages more investment.

Question 17

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving:
A)rises by $40 billion.
B)rises by $60 billion.
C)falls by $60 billion.
D)falls by $40 billion.

Accepted Answer

Since output does not change, the $100 billion increase in lump-sum taxes will be offset by a decrease in other components of aggregate demand, such as consumption or investment. Given a marginal propensity to consume of 0.6, we can calculate that consumption will decrease by $60 billion (0.6 x $100 billion). Since private saving is equal to income minus consumption, which has decreased by $60 billion, private saving will fall by $40 billion ($100 billion - $60 billion). Therefore, the correct answer is D.

Question 18

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. Holding other things constant, when the government lowers taxes on business investment, thus increasing investment demand, the quantity of investment:
A)increases and the interest rate rises.
B)is unchanged and the interest rate rises.
C)and the interest rate are both unchanged.
D)decreases and the interest rate rises.

Accepted Answer

The answer of Use the model developed in Chapter 3...

Question 19

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, public saving:
A)rises by $100 billion.
B)rises by $60 billion.
C)falls by $60 billion.
D)falls by $100 billion.

Accepted Answer

When the government raises lump-sum taxes on income by $100 billion and output does not change, it means that the entire amount of the tax increase goes into public saving, increasing it by $100 billion. The marginal propensity to consume affects private consumption but does not directly affect the calculation of public saving in this scenario.

Question 20

An example of decreasing returns to scale is when capital and labour inputs:
A)both increase 10 percent and output increases 5 percent.
B)both increase 10 percent and output increases 10 percent.
C)both increase 5 percent and output increases 10 percent.
D)do not change and output increases 5 percent.

Accepted Answer

Decreasing returns to scale occur when an increase in inputs leads to a less than proportional increase in output. In choice A, both inputs increase by 10%, but output only increases by 5%, indicating decreasing returns to scale.

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

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wages of:

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, investment:

When there is a fixed supply of loanable funds, an increase in investment demand results in:

When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a _ interest rate and _ in the quantity of investment.

An example of increasing returns to scale is when capital and labour inputs:

If increased immigration raises the labour force, the neoclassical theory of distribution predicts that:

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given level of disposable income. This shift, in a neoclassical economy, will:

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, national saving:

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts that:

If a technological advancement increases productivity, the neoclassical theory of distribution predicts that:

In a neoclassical economy, assume that the government lowers both government spending and taxes by $100 billion. If the marginal propensity to consume is 0.6, investment will:

In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. This causes:

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving:

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. Holding other things constant, when the government lowers taxes on business investment, thus increasing investment demand, the quantity of investment:

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, public saving:

An example of decreasing returns to scale is when capital and labour inputs: