Question 1

An individual stock price
A)determines the future performance of the firm.
B)incorporates all news about the firm's future prospects.
C)determines investment spending.
D)is inversely related to the interest rate.
E)mimics the information contained in the stock market index.

Accepted Answer

An individual stock price incorporates all news about the firm's future prospects. While stock price can have an impact on investment spending, it does not determine it. Stock price is not necessarily inversely related to interest rates, and it may not mimic the information contained in the stock market index.

Question 2

The total government expenditure multiplier is
A) equal to the MPC.
B) equal to $\frac { 1 } { 1 - \mathrm { MPC } }$.
C) 1 .
D) larger than 1 .
E) between 0 and 1 .

Accepted Answer

E

Question 3

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

Accepted Answer

An increase in lifetime wealth typically leads individuals to work less, as they can maintain their desired standard of living with less labor. This results in a leftward shift of the current labor supply curve.

Question 4

In response to a temporary increase in government spending, the representative consumer consumes
A)more and takes less leisure.
B)more and takes more leisure.
C)the same amount as leisure.
D)less and takes more leisure.
E)less and takes less leisure.

Accepted Answer

The answer of In response to a temporary increase in...

Question 5

The marginal cost of investment for the firm is equal to
A) $- M P ^ { \prime } K$.
B) $1 / M P ^ { \prime } K$.
C) 1 .
D) $M P ^ { \prime } K$.
E) $- 1$.

Accepted Answer

The answer of The marginal cost of investment for the...

Question 6

Investment tends to be more variable over the business cycle than
A)aggregate output.
B)real interest rates.
C)government spending.
D)consumer income.
E)savings.

Accepted Answer

Investment is known to be more variable over the business cycle than aggregate output as businesses tend to adjust their investment plans in response to changes in economic conditions such as demand, interest rates, and uncertainty. In contrast, aggregate output tends to respond more slowly and with a lag to changes in the business cycle. Real interest rates, government spending, consumer income, and savings also tend to be less variable over the business cycle, making option A the best choice.

Question 7

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

Accepted Answer

An increase in lifetime wealth typically leads to a decrease in current labor supply because individuals can afford to work less and enjoy more leisure time, while also increasing their current consumption due to the higher wealth.

Question 8

The firm will hire current labour until
A)the marginal product of labour is less than the real interest rate.
B)profits are maximized.
C)total factor productivity is maximized.
D)the marginal product of labour equals the wage rate.
E)the marginal product of labour equals total employment.

Accepted Answer

The firm will hire current labour until the marginal product of labour equals the wage rate. This is because as long as the marginal product of labour is greater than the wage rate, hiring additional labour will increase the firm's profits. However, once the marginal product of labour falls below the wage rate, the cost of hiring additional labour exceeds the benefits, and hiring more workers would decrease the firm's profits. Therefore, the profit-maximizing level of labour employment occurs when the marginal product of labour equals the wage rate.

Question 9

The output supply curve is the relationship between output and
A)capital stock.
B)total factor productivity.
C)investment.
D)labour supply.
E)real interest rates.

Accepted Answer

The answer of The output supply curve is the relationship...

Question 10

The condition MRS1,C = w describes the representative consumer's
A)current period work-leisure decision.
B)future period work- leisure decision.
C)future consumption-savings decision.
D)current consumption-savings decision.
E)investment decision.

Accepted Answer

MRS1,C is the marginal rate of substitution between consumption and leisure in the current period, and w is the wage rate. Therefore, the condition MRS1,C = w describes the representative consumer's current period work-leisure decision, which is choice A.

Question 11

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

Accepted Answer

An increase in the real interest rate makes saving more attractive, so people will shift their preferences towards saving and away from current consumption. This will result in a downward shift in the demand for current consumption.

Question 12

An increase in total factor productivity causes
A)real interest rates to rise.
B)the production function to shift up.
C)the output supply curve to shift left.
D)real wages to rise.
E)labour supply to fall.

Accepted Answer

An increase in total factor productivity causes the production function to shift up, meaning that more output can be produced with the same amount of inputs. This leads to an increase in economic growth and potentially higher real wages. However, it does not affect real interest rates, the output supply curve, or labour supply.

Question 13

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

Accepted Answer

The slope of the demand for consumption goods is equal to the marginal propensity to consume (MPC), which is the change in consumption resulting from a change in income. This is because as income increases, people tend to spend a portion of that increase on consumption goods, and the MPC measures that relationship. Therefore, the correct choice is D, the MPC.

Question 14

The marginal rate of substitution of future leisure for future consumption must be equal to
A)the relative price of current consumption in terms of future consumption.
B)the future real wage.
C)one.
D)savings in the current period.
E)the real interest rate.

Accepted Answer

The marginal rate of substitution of future leisure for future consumption must be equal to the future real wage. This is because the future real wage represents the opportunity cost of leisure in terms of foregone future consumption.

Question 15

When drawn against the real interest rate, the output supply curve is upward sloping because labour supply is
A)independent of the real interest rate and labour demand is increasing the real interest rate.
B)increasing as the wage rate rises.
C)independent of the real interest rate and labour demand is decreasing the real interest rate.
D)increasing the real interest rate and labour demand is independent of the real interest rate.
E)decreasing the real interest rate and labour demand is independent of the real interest rate.

Accepted Answer

The answer of When drawn against the real interest rate,...

Question 16

The representative consumer's current labour supply curve slopes upward under the assumption that
A)the substitution effect of an increase in the real wage is less than the income effect.
B)the substitution effect of an increase in the current labour supply outweighs the income effect.
C)there is an indirect relationship between the current real wage and current labour supply.
D)the substitution effect of an increase in the real wage 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 labor supply curve of the representative consumer assumes that the substitution effect of an increase in the real wage outweighs the income effect. This means that as the real wage increases, the opportunity cost of leisure time increases, and the consumer is willing to work more hours to earn the higher real wage. This is the substitution effect. However, as the real wage increases, the consumer also becomes wealthier and may choose to work fewer hours because of the increased income. This is the income effect. Since the substitution effect dominates, the labor supply curve slopes upward.

Question 17

The equilibrium effects of a prospective future increase in total factor productivity include
A)a decrease in the real wage only.
B)a decrease in the real wage and a decrease in the real interest rate.
C)an increase in the real wage and a decrease in the real interest rate.
D)a decrease in the real wage and an increase in the real interest rate.
E)an increase in the real wage and an increase in the real interest rate.

Accepted Answer

The answer of The equilibrium effects of a prospective future...

Question 18

A rational bubble is
A)when everyone behaves optimally and an asset price departs from its fundamental value.
B)when asset prices are entirely explained by fundamental factors.
C)never observed.
D)always temporary.
E)how Robert Shiller explains asset market behaviour.

Accepted Answer

A rational bubble occurs when everyone behaves optimally, meaning they are making rational decisions based on the available information, but the asset price still deviates from its fundamental value. This concept is often used by economist Robert Shiller to explain certain market behaviors.

Question 19

When drawn against the real interest rate, the output supply curve unambiguously shifts to the right if either or both of the following occur.
A)an increase in current government spending and a decrease in future government spending
B)a decrease in current government spending and an increase in the real interest rate
C)a decrease in current government spending and a decrease in future government spending
D)an increase in current government spending and an increase in future government spending
E)a decrease in current government spending and an increase in future government spending

Accepted Answer

The answer of When drawn against the real interest rate,...

Question 20

The total government expenditure multiplier is less than one because
A)investment demand falls dramatically when the government goes into debt.
B)the marginal propensity to consume is less than one.
C)labour supply reacts to interest rate changes and consumption demand is affected by taxes.
D)the marginal propensity to consume is greater than one.
E)government expenditures affect labour demand.

Accepted Answer

The answer of The total government expenditure multiplier is less...

Quiz 11: A Real Intertemporal Model With Investment

An individual stock price

The total government expenditure multiplier is

An increase in lifetime wealth

In response to a temporary increase in government spending, the representative consumer consumes

The marginal cost of investment for the firm is equal to

Investment tends to be more variable over the business cycle than

An increase in lifetime wealth is likely to

The firm will hire current labour until

The output supply curve is the relationship between output and

The condition MRS1,C = w describes the representative consumer's

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

An increase in total factor productivity causes

The slope of the demand for consumption goods is

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

When drawn against the real interest rate, the output supply curve is upward sloping because labour supply is

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

The equilibrium effects of a prospective future increase in total factor productivity include

A rational bubble is

When drawn against the real interest rate, the output supply curve unambiguously shifts to the right if either or both of the following occur.

The total government expenditure multiplier is less than one because