Question 1

The yield curve shows

Accepted Answer

A) the yields on stocks of different maturities. 
B) the interest rates on bonds of different maturities. 
C) the yields on stocks with differing default risk. 
D) the yields on bonds with differing default risk. 
A) the yields on stocks of different maturities. 
B) the interest rates on bonds of different maturities. 
C) the yields on stocks with differing default risk. 
D) the yields on bonds with differing default risk.

Question 2

If an investor has a tax rate on interest income of 30% and the inflation rate is 4%,which bond has the highest expected real after-tax interest rate?

Accepted Answer

A) A Treasury bond paying 8% 
B) A corporate bond paying 7% 
C) A Treasury bond paying 7% 
D) A municipal bond paying 6% 
A) A Treasury bond paying 8% 
B) A corporate bond paying 7% 
C) A Treasury bond paying 7% 
D) A municipal bond paying 6%

Question 3

According to the Ricardian equivalence proposition,a temporary government budget deficit created by cutting taxes

Accepted Answer

A) will cause desired consumption to increase. 
B) will cause future taxes to increase but will have no real economic effects. 
C) will have the same real economic effects as a budget deficit created by raising government spending. 
D) would have the same real effects whether or not consumers expect future taxes to change. 
A) will cause desired consumption to increase. 
B) will cause future taxes to increase but will have no real economic effects. 
C) will have the same real economic effects as a budget deficit created by raising government spending. 
D) would have the same real effects whether or not consumers expect future taxes to change.

Question 4

If a firm's expected marginal product of capital exceeds its tax-adjusted user cost of capital,the firm will

Accepted Answer

A) increase its investment spending on capital goods. 
B) reduce its investment spending on capital goods. 
C) not change its investment spending on capital goods. 
D) increase the tax-adjusted user cost of capital. 
A) increase its investment spending on capital goods. 
B) reduce its investment spending on capital goods. 
C) not change its investment spending on capital goods. 
D) increase the tax-adjusted user cost of capital.

Question 5

David consumes 140 in the current period and 210 in the future period.The real interest rate is 5% per period.David's present value of lifetime consumption is

Accepted Answer

A) 210. 
B) 340. 
C) 350. 
D) 400. 
A) 210. 
B) 340. 
C) 350. 
D) 400.

Question 6

Calculate the user cost of capital of a machine that costs $100,000 and depreciates at a rate of 25%,when the nominal interest rate is 4% and the expected inflation rate is 1%.

Accepted Answer

A) $3000 
B) $25,000 
C) $28,000 
D) $29,000 
A) $3000 
B) $25,000 
C) $28,000 
D) $29,000

Question 7

You are trying to figure out how much capacity to add to your factory.You will increase capacity as long as

Accepted Answer

A) the expected marginal product of capital is positive. 
B) the expected marginal product of capital is greater than or equal to the marginal product of capital. 
C) the expected marginal product of capital is greater than or equal to the expected marginal product of labor. 
D) the expected marginal product of capital is greater than or equal to the user cost of capital. 
A) the expected marginal product of capital is positive. 
B) the expected marginal product of capital is greater than or equal to the marginal product of capital. 
C) the expected marginal product of capital is greater than or equal to the expected marginal product of labor. 
D) the expected marginal product of capital is greater than or equal to the user cost of capital.

Question 8

You have just purchased a home that cost $250,000.The nominal mortgage interest rate is 8% per annum,mortgage interest payments are tax deductible,and you are in a 30% tax bracket.The expected inflation rate is 4%.Maintenance and other expenses are 8% of the initial value of the house.What is the real user cost of your house?

Accepted Answer

A) $20,000 
B) $24,000 
C) $27,000 
D) $30,000 
A) $20,000 
B) $24,000 
C) $27,000 
D) $30,000

Question 9

When a person gets an increase in current income,what is likely to happen to consumption and saving?

Accepted Answer

A) Consumption increases and saving increases. 
B) Consumption increases and saving decreases. 
C) Consumption decreases and saving increases. 
D) Consumption decreases and saving decreases. 
A) Consumption increases and saving increases. 
B) Consumption increases and saving decreases. 
C) Consumption decreases and saving increases. 
D) Consumption decreases and saving decreases.

Question 10

An increase in the expected real interest rate tends to

Accepted Answer

A) raise desired saving only. 
B) raise desired investment only. 
C) raise both desired saving and desired investment. 
D) raise desired saving, but lower desired investment. 
A) raise desired saving only. 
B) raise desired investment only. 
C) raise both desired saving and desired investment. 
D) raise desired saving, but lower desired investment.

Question 11

If the government reduces the effective tax rate on capital (in a closed economy),then the real interest rate ________ and saving ________.

Accepted Answer

A) falls; declines 
B) falls; increases 
C) rises; increases 
D) rises; declines 
A) falls; declines 
B) falls; increases 
C) rises; increases 
D) rises; declines

Question 12

Suppose the government provides a tax cut today that is matched by a tax increase in the future that's equal in present value to the tax cut.This causes a consumer's saving to

Accepted Answer

A) decrease. 
B) increase. 
C) remain unchanged. 
D) increase if the person was a lender and decrease if the person was a borrower. 
A) decrease. 
B) increase. 
C) remain unchanged. 
D) increase if the person was a lender and decrease if the person was a borrower.

Question 13

Cummins,Hubbard,and Hassett studied the effects of taxes on investment by

Accepted Answer

A) seeing if investment spending is correlated with taxes on investment. 
B) examining what happened to investment when major tax reforms took place. 
C) raising tax rates on certain businesses and testing their reaction. 
D) raising tax rates on equipment and reducing tax rates on structures. 
A) seeing if investment spending is correlated with taxes on investment. 
B) examining what happened to investment when major tax reforms took place. 
C) raising tax rates on certain businesses and testing their reaction. 
D) raising tax rates on equipment and reducing tax rates on structures.

Question 14

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a rate of 25%,machine B costs $10,000 and depreciates at a rate of 20%,machine C costs $20,000 and depreciates at a rate of 10%,and machine D costs $17,000 and depreciates at a rate of 11%.The expected real interest rate is 0%.

Accepted Answer

A) Machine A 
B) Machine B 
C) Machine C 
D) Machine D 
A) Machine A 
B) Machine B 
C) Machine C 
D) Machine D

Question 15

David consumes 200 in the current period and 330 in the future period.The real interest rate is 10% per period.David's present value of lifetime consumption is

Accepted Answer

A) 500. 
B) 530. 
C) 550. 
D) 563. 
A) 500. 
B) 530. 
C) 550. 
D) 563.

Question 16

In the saving-investment diagram,an increase in current output would

Accepted Answer

A) shift the saving curve to the left. 
B) shift the investment demand curve to the left. 
C) not shift the curves. 
D) shift the saving curve to the right. 
A) shift the saving curve to the left. 
B) shift the investment demand curve to the left. 
C) not shift the curves. 
D) shift the saving curve to the right.

Question 17

Desired national saving would increase unambiguously if there were

Accepted Answer

A) an increase in both current output and expected future output. 
B) an increase in both expected future output and government purchases. 
C) an increase in both expected future output and the expected real interest rate. 
D) a fall in both government purchases and expected future output. 
A) an increase in both current output and expected future output. 
B) an increase in both expected future output and government purchases. 
C) an increase in both expected future output and the expected real interest rate. 
D) a fall in both government purchases and expected future output.

Question 18

An economy has government purchases of 1000.Desired national saving and desired investment are given by Sd = 200 + 5000r + 0.10Y - 0.20G
Id = 1000 - 4000r
When the full-employment level of output equals 5000,then the real interest rate that clears the goods market will be

Accepted Answer

A) 1)11%. 
B) 5)56%. 
C) 16.67%. 
D) 21.11%. 
A) 1)11%. 
B) 5)56%. 
C) 16.67%. 
D) 21.11%.

Question 19

Suppose you divide your life into two periods: working age and retirement age.When you work,you earn labor income Y; when retired,you earn no labor income,but must live off your savings and the interest it earns.You have no initial assets.You save the amount S while working,earning interest at rate r,so you have (1 + r)S to live on when retired.Because you don't need to consume as much when retired,you want to set consumption when working twice as high as consumption when retired.
(a)Suppose you earn $1 million over your working life,and the real interest rate for retirement saving is 50%.How much will you save,and how much will you consume in each part of your life?
(b)Suppose your current income went up to $2 million when working.Now what will you save and how much will you consume each period?
(c)Suppose a social security system will pay you 25% of your working income when you are retired.Now (with Y = $1 million as in part (a)how much will you save and how much will you consume each period?
(d)Suppose the interest rate rises.Will you save more or less?

Accepted Answer

(a)c_W = Y - S,c_R = (1 + r)S; c_R = 2c_R.So Y -

Question 20

If the stock market booms and people feel wealthier (in a closed economy),then the real interest rate ________ and investment ________.

Accepted Answer

A) falls; declines 
B) falls; increases 
C) rises; increases 
D) rises; declines 
A) falls; declines 
B) falls; increases 
C) rises; increases 
D) rises; declines

The yield curve shows

If an investor has a tax rate on interest income of 30% and the inflation rate is 4%,which bond has the highest expected real after-tax interest rate?

According to the Ricardian equivalence proposition,a temporary government budget deficit created by cutting taxes

If a firm's expected marginal product of capital exceeds its tax-adjusted user cost of capital,the firm will

David consumes 140 in the current period and 210 in the future period.The real interest rate is 5% per period.David's present value of lifetime consumption is

Calculate the user cost of capital of a machine that costs $100,000 and depreciates at a rate of 25%,when the nominal interest rate is 4% and the expected inflation rate is 1%.

You are trying to figure out how much capacity to add to your factory.You will increase capacity as long as

When a person gets an increase in current income,what is likely to happen to consumption and saving?

An increase in the expected real interest rate tends to

If the government reduces the effective tax rate on capital (in a closed economy),then the real interest rate and saving .

Suppose the government provides a tax cut today that is matched by a tax increase in the future that's equal in present value to the tax cut.This causes a consumer's saving to

Cummins,Hubbard,and Hassett studied the effects of taxes on investment by

David consumes 200 in the current period and 330 in the future period.The real interest rate is 10% per period.David's present value of lifetime consumption is

In the saving-investment diagram,an increase in current output would

Desired national saving would increase unambiguously if there were

An economy has government purchases of 1000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G I^d= 1000 - 4000r When the full-employment level of output equals 5000,then the real interest rate that clears the goods market will be

If the stock market booms and people feel wealthier (in a closed economy),then the real interest rate and investment .

Introduction to Macroeconomics

The Measurement and Structure of the National Economy

Productivity, output, and Employment

Saving and Investment in the Open Economy

Long-Run Economic Growth

The Asset Market, money, and Prices

Business Cycles

The Is-Lmad-As Model

Classical Business Cycle Analysis

Keynesianism: the Macroeconomics of Wage and Price Rigidity

Unemployment and Inflation

Exchange Rates, business Cycles, and Macroeconomic Policy in the Open Economy

Monetary Policy and the Federal Reserve System

Government Spending and Its Financing

Filters

Exam 4: Consumption, saving, and Investment

The yield curve shows

If an investor has a tax rate on interest income of 30% and the inflation rate is 4%,which bond has the highest expected real after-tax interest rate?

According to the Ricardian equivalence proposition,a temporary government budget deficit created by cutting taxes

If a firm's expected marginal product of capital exceeds its tax-adjusted user cost of capital,the firm will

David consumes 140 in the current period and 210 in the future period.The real interest rate is 5% per period.David's present value of lifetime consumption is

Calculate the user cost of capital of a machine that costs $100,000 and depreciates at a rate of 25%,when the nominal interest rate is 4% and the expected inflation rate is 1%.

You are trying to figure out how much capacity to add to your factory.You will increase capacity as long as

When a person gets an increase in current income,what is likely to happen to consumption and saving?

An increase in the expected real interest rate tends to

If the government reduces the effective tax rate on capital (in a closed economy),then the real interest rate ________ and saving ________.

Suppose the government provides a tax cut today that is matched by a tax increase in the future that's equal in present value to the tax cut.This causes a consumer's saving to

Cummins,Hubbard,and Hassett studied the effects of taxes on investment by

David consumes 200 in the current period and 330 in the future period.The real interest rate is 10% per period.David's present value of lifetime consumption is

In the saving-investment diagram,an increase in current output would

Desired national saving would increase unambiguously if there were

An economy has government purchases of 1000.Desired national saving and desired investment are given by Sd = 200 + 5000r + 0.10Y - 0.20G Id = 1000 - 4000r When the full-employment level of output equals 5000,then the real interest rate that clears the goods market will be

If the stock market booms and people feel wealthier (in a closed economy),then the real interest rate ________ and investment ________.

Introduction to Macroeconomics

The Measurement and Structure of the National Economy

Productivity, output, and Employment

Saving and Investment in the Open Economy

Long-Run Economic Growth

The Asset Market, money, and Prices

Business Cycles

The Is-Lmad-As Model

Classical Business Cycle Analysis

Keynesianism: the Macroeconomics of Wage and Price Rigidity

Unemployment and Inflation

Exchange Rates, business Cycles, and Macroeconomic Policy in the Open Economy

Monetary Policy and the Federal Reserve System

Government Spending and Its Financing

Filters

If the government reduces the effective tax rate on capital (in a closed economy),then the real interest rate and saving .

An economy has government purchases of 1000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G I^d= 1000 - 4000r When the full-employment level of output equals 5000,then the real interest rate that clears the goods market will be

If the stock market booms and people feel wealthier (in a closed economy),then the real interest rate and investment .