Question 1

If increased immigration raises the labor force, the neoclassical theory of distribution predicts:
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 due to increased immigration would lead to a decrease in the marginal productivity of labor. This would cause the real wage to fall as employers would be able to hire more workers for the same wage. However, the increase in the labor force would also lead to an increase in demand for capital, causing the real rental price of capital to rise. Therefore, the correct answer is that the real wage will fall and the real rental price of capital will rise.

Question 2

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

Accepted Answer

When there is a fixed supply of loanable funds and an increase in investment demand, borrowers will compete for the available funds, pushing up the interest rate to a new equilibrium point that balances savings and investment. Therefore, the correct answer is A - higher interest rate.

Question 3

Use the model developed in Chapter 3, but assume that consumption decreases, other things being equal, when the interest rate rises. If there is a technological advance that leads to an increase in investment demand:
A) investment increases and the interest rate rises.
B) investment is unchanged and the interest rate rises.
C) investment and the interest rate are both unchanged.
D) investment decreases and the interest rate rises.

Accepted Answer

If consumption decreases with a rise in interest rates, then the aggregate demand curve will shift leftward, leading to a fall in output/income and employment. As a result, investment demand would have to increase to restore equilibrium. The increase in investment demand would lead to an increase in the interest rate and a further reduction in consumption. Hence, investment increases and the interest rate rises.

Question 4

Use the following to answer questions : Exhibit: Saving, Investment, and the Interest Rate 2 -(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

A technological innovation that increases the demand for investment goods will shift the investment curve to the right, resulting in a new equilibrium at a higher real interest rate, and higher levels of saving and investment. This is represented by Point B on the exhibit.

Question 5

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

The answer of The government raises lump-sum taxes on income...

Question 6

An example of decreasing returns to scale is when capital and labor 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 the percentage increase in inputs leads to a smaller percentage increase in output. In option A, a 10 percent increase in both capital and labor results in only a 5 percent increase in output, illustrating decreasing returns to scale.

Question 7

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 government raises lump-sum taxes on income by $100 billion, which reduces disposable income by $100 billion. The marginal propensity to consume is 0.6, so consumption falls by $60 billion (0.6 x $100 billion). This reduces aggregate demand, which leads to a fall in investment of $60 billion.

Question 8

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when the government lowers taxes on business investment, thus increasing desired investment, but does not change government spending or change any taxes that affect disposable income, then 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 9

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

Since output does not change, the lump-sum tax increase is not affecting investment. Using the equation Y = C + I + G + NX, where NX is assumed to be constant, we can see that if output (Y) stays constant, then consumption (C) must also stay constant. Given the marginal propensity to consume of 0.6, this means that for every $1 increase in income, consumption will increase by $0.60. Therefore, out of the $100 billion tax increase, only $40 billion (0.6*$100 billion) will be taken out of consumption. The remaining $60 billion will be saved, so national saving will rise by $60 billion.

Question 10

Use the following to answer questions : Exhibit: Saving, Investment, and the Interest Rate 2 -(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 correct answer is A because a decrease in investment demand will shift the investment curve to the left, leading to a new equilibrium at a lower real interest rate (r2) and lower levels of saving (S2) and investment (I2).

Question 11

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts:
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, the destruction of capital stock reduces the supply of capital, leading to an increase in the rental price of capital. At the same time, the reduction in capital also reduces labor productivity, leading to a decrease in the real wage. Therefore, the real wage will fall and the real rental price of capital will rise.

Question 12

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when there is a technological advance that leads to an increase in investment demand:
A) investment increases and the interest rate rises.
B) investment is unchanged and the interest rate rises.
C) investment and the interest rate are both unchanged.
D) investment increases and the interest rate falls.

Accepted Answer

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

Question 13

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 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

An increase in consumer confidence leads to higher current consumption, which in turn increases demand for funds. This higher demand for funds raises the interest rate. As the interest rate rises, the cost of borrowing increases, leading to a decrease in investment.

Question 14

If a neutral technological advance improves the production function, the neoclassical theory of distribution predicts:
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

A neutral technological advance improves productivity without favoring labor or capital specifically, leading to an increase in output. This generally allows for higher payments to both labor (real wages) and capital (real rental price), as the overall economic pie has grown.

Question 15

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 16

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 wage(s) 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 neoclassical theory, as productivity increases, the marginal product of labor (MPL) increases, leading to an increase in real wages. As the productivity of farmers has risen substantially due to technological progress, the MPL has increased, leading to an increase in real wages of both farmers and barbers. Additionally, workers being able to move freely between these two professions would ensure that the wage rate in each profession would be equal to the MPL, leading to an increase in real wages over time for both professions. Thus, both barbers and farmers should have seen an increase in their real wages over time. Therefore, option B is the best choice for this scenario.

Question 17

In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. By doing so:
A) investment falls and the interest rate rises.
B) investment rises and the interest rate falls.
C) investment and the interest rate both fall.
D) investment and the interest rate both rise.

Accepted Answer

Lowering both government spending and taxes by the same amount reduces the government's demand for loanable funds, which decreases the interest rate. Lower interest rates make borrowing cheaper, encouraging more investment.

Question 18

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 19

An example of increasing returns to scale is when capital and labor 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, a 5% increase in both capital and labor results in a 10% increase in output, exemplifying increasing returns to scale.

Question 20

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 investment demand increases, it shifts the demand curve for loanable funds to the right. Given that the supply of loanable funds increases with the interest rate, this shift results in a new equilibrium with a higher interest rate and an increased quantity of investment. This is because the higher interest rate incentivizes more savings, making more funds available for investment.

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

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

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

Use the model developed in Chapter 3, but assume that consumption decreases, other things being equal, when the interest rate rises. If there is a technological advance that leads to an increase in investment demand:

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:

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

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:

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:

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when there is a technological advance that leads to an increase in investment demand:

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 income. This shift, in a neoclassical economy, will:

If a neutral technological advance improves the production function, the neoclassical theory of distribution predicts:

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 wage(s) of:

In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. By doing so:

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 increasing returns to scale is when capital and labor inputs:

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.