Question 1

Which of the factors listed below might cause the Ricardian equivalence proposition to be violated?

Accepted Answer

A) There may be international capital inflows and outflows. 
B) Consumers may not understand that an increase in government borrowing today is likely to lead to higher future taxes. 
C) There may be constraints on the level of government spending. 
D) There may be constraints on the level of government taxation. 
A) There may be international capital inflows and outflows. 
B) Consumers may not understand that an increase in government borrowing today is likely to lead to higher future taxes. 
C) There may be constraints on the level of government spending. 
D) There may be constraints on the level of government taxation.

Question 2

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 3

Use a saving-investment diagram to explain what happens to saving,investment,and the real interest rate in each of the following scenarios in a closed economy.
(a)In an agricultural economy,great weather this year promises a bumper crop next year,leading citizens to expect higher income next year.
(b)Government regulations going into effect next year will reduce the marginal product of capital.
(c)The government increases lump-sum taxes on citizens.

Accepted Answer

The answer of Use a saving-investment diagram to explain what...

Question 4

Suppose your company is in equilibrium,with its capital stock at its desired level.A permanent increase in the depreciation rate now has what effect on your desired capital stock?

Accepted Answer

A) Raises it,because the future marginal productivity of capital is higher 
B) Lowers it,because the future marginal productivity of capital is lower 
C) Raises it,because the user cost of capital is now lower 
D) Lowers it,because the user cost of capital is now higher 
A) Raises it,because the future marginal productivity of capital is higher 
B) Lowers it,because the future marginal productivity of capital is lower 
C) Raises it,because the user cost of capital is now lower 
D) Lowers it,because the user cost of capital is now higher

Question 5

With a nominal interest rate of 4%,an expected inflation rate of 1%,and interest income taxed at a rate of 25%,what is the expected after-tax real interest rate?

Accepted Answer

A) 3% 
B) 2% 
C) 1% 
D) 0% 
A) 3% 
B) 2% 
C) 1% 
D) 0%

Question 6

At the start of the year,your firm's capital stock equaled $10 million,and at the end of the year it equaled $15 million.The average depreciation rate on your capital stock is 20%.Net investment during the year equaled

Accepted Answer

A) $3 million. 
B) $4 million. 
C) $5 million. 
D) $7 million. 
A) $3 million. 
B) $4 million. 
C) $5 million. 
D) $7 million.

Question 7

For a borrower,an increase in the real interest rate will lead to

Accepted Answer

A) higher current consumption and less borrowing. 
B) higher current consumption and less saving. 
C) lower current consumption and less borrowing. 
D) lower current consumption and less saving. 
A) higher current consumption and less borrowing. 
B) higher current consumption and less saving. 
C) lower current consumption and less borrowing. 
D) lower current consumption and less saving.

Question 8

Rachel earns nothing during her learning period,1100 during her working period,and nothing during her retirement period.She has initial assets of 300.The real interest rate is zero.Rachel is not allowed to borrow by the banks.Whenever possible,Rachel wants to smooth consumption between periods.How much will she save during her working period?

Accepted Answer

A) 400 
B) 550 
C) 700 
D) 950 
A) 400 
B) 550 
C) 700 
D) 950

Question 9

The nominal interest rate is 10%,the expected inflation rate is 5%,and the combined state-federal tax rate is 35%.The expected after-tax real interest rate is

Accepted Answer

A) 1)50%. 
B) 3)25%. 
C) 5)00%. 
D) 6)50%. 
A) 1)50%. 
B) 3)25%. 
C) 5)00%. 
D) 6)50%.

Question 10

What are the economic consequences of reductions in defense spending by the government? What happens to national saving,the interest rate,and investment?

Accepted Answer

The reduction in defense spend

Question 11

An increase in the personal income tax rate on interest income will

Accepted Answer

A) increase desired saving because the expected after-tax real interest rate rises. 
B) decrease desired saving because the expected after-tax real interest rate rises. 
C) decrease desired saving because the expected after-tax real interest rate falls. 
D) increase desired saving because the expected after-tax real interest rate falls. 
A) increase desired saving because the expected after-tax real interest rate rises. 
B) decrease desired saving because the expected after-tax real interest rate rises. 
C) decrease desired saving because the expected after-tax real interest rate falls. 
D) increase desired saving because the expected after-tax real interest rate falls.

Question 12

An invention that raises the future marginal product of capital (in a closed economy)would cause an increase in desired investment,which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________.

Accepted Answer

A) right; increase 
B) right; decrease 
C) left; increase 
D) left; decrease 
A) right; increase 
B) right; decrease 
C) left; increase 
D) left; decrease

Question 13

Three factors that cause interest rates among different financial instruments to vary are

Accepted Answer

A) default risk,expected inflation,and taxability. 
B) default risk,current inflation,and taxability. 
C) default risk,maturity,and taxability. 
D) default risk,expected inflation,and maturity. 
A) default risk,expected inflation,and taxability. 
B) default risk,current inflation,and taxability. 
C) default risk,maturity,and taxability. 
D) default risk,expected inflation,and maturity.

Question 14

The desire to have a relatively even pattern of consumption over time is known as

Accepted Answer

A) excess sensitivity. 
B) the substitution effect. 
C) the consumption-smoothing motive. 
D) forced saving. 
A) excess sensitivity. 
B) the substitution effect. 
C) the consumption-smoothing motive. 
D) forced saving.

Question 15

If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a ________ in consumption and a ________ in saving,for someone who's a lender.

Accepted Answer

A) fall; fall 
B) fall; rise 
C) rise; rise 
D) rise; fall 
A) fall; fall 
B) fall; rise 
C) rise; rise 
D) rise; fall

Question 16

What is the marginal propensity to consume,and why is it always less than one?

Accepted Answer

The marginal propensity to consume (MPC)

Question 17

Jane wants to save $1000 of current income.With an IRA,no taxes are paid on income or interest until the money is withdrawn in five years.Without an IRA,taxes must be paid whenever income or interest is received.Jane's federal/state tax bracket is 35%,and the nominal interest rate is 8%.
(a)How much money will Jane have if she puts her money in an IRA and withdraws the money in five years?
(b)How much money will Jane have if she does NOT put her money in an IRA,but rather in a regular (taxable)savings account,for five years?
(c)How much does Jane gain in five years by using an IRA rather than a regular savings account?

Accepted Answer

(a)$955.06 = [$1000 × (1.08] @#IMG-DLM&

Question 18

At the start of the year,your firm's capital stock equaled $100 million,and at the end of the year it equaled $105 million.The average depreciation rate on your capital stock is 20%.Gross investment during the year equaled

Accepted Answer

A) $1 million. 
B) $5 million. 
C) $7 million. 
D) $25 million. 
A) $1 million. 
B) $5 million. 
C) $7 million. 
D) $25 million.

Question 19

With no inflation and a nominal interest rate (i)of .03,a person can trade off one unit of current consumption for ________ units of future consumption.

Accepted Answer

A) 0)97 
B) 1)03 
C) .03 
D) -.03 
A) 0)97 
B) 1)03 
C) .03 
D) -.03

Question 20

A firm's output (Y)depends on how much capital (K)it has,according to the equation: Y = 20K - K2.The real interest rate is 6% per year,the depreciation rate of capital is 14% per year and the price of a unit of capital is $80,and each unit of output sells for $1.
(a)For capital levels of 0 to 6,how much is output?
(b)For capital levels from 1 to 6,calculate the marginal product of capital.
(c)How many units of capital does the firm desire?
(d)If the real interest rate was 1% per year,how many units of capital would the firm desire?

Accepted Answer

(a)& (b)
CapitalOutputMPK
00---
11919
23

Which of the factors listed below might cause the Ricardian equivalence proposition to be violated?

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

Suppose your company is in equilibrium,with its capital stock at its desired level.A permanent increase in the depreciation rate now has what effect on your desired capital stock?

With a nominal interest rate of 4%,an expected inflation rate of 1%,and interest income taxed at a rate of 25%,what is the expected after-tax real interest rate?

At the start of the year,your firm's capital stock equaled $10 million,and at the end of the year it equaled $15 million.The average depreciation rate on your capital stock is 20%.Net investment during the year equaled

For a borrower,an increase in the real interest rate will lead to

The nominal interest rate is 10%,the expected inflation rate is 5%,and the combined state-federal tax rate is 35%.The expected after-tax real interest rate is

What are the economic consequences of reductions in defense spending by the government? What happens to national saving,the interest rate,and investment?

An increase in the personal income tax rate on interest income will

An invention that raises the future marginal product of capital (in a closed economy)would cause an increase in desired investment,which would cause the investment curve to shift to the and would cause the real interest rate to .

Three factors that cause interest rates among different financial instruments to vary are

The desire to have a relatively even pattern of consumption over time is known as

If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a in consumption and a in saving,for someone who's a lender.

What is the marginal propensity to consume,and why is it always less than one?

At the start of the year,your firm's capital stock equaled $100 million,and at the end of the year it equaled $105 million.The average depreciation rate on your capital stock is 20%.Gross investment during the year equaled

With no inflation and a nominal interest rate (i)of .03,a person can trade off one unit of current consumption for ________ units of future consumption.

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-LM/AD-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

Which of the factors listed below might cause the Ricardian equivalence proposition to be violated?

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

Suppose your company is in equilibrium,with its capital stock at its desired level.A permanent increase in the depreciation rate now has what effect on your desired capital stock?

With a nominal interest rate of 4%,an expected inflation rate of 1%,and interest income taxed at a rate of 25%,what is the expected after-tax real interest rate?

At the start of the year,your firm's capital stock equaled $10 million,and at the end of the year it equaled $15 million.The average depreciation rate on your capital stock is 20%.Net investment during the year equaled

For a borrower,an increase in the real interest rate will lead to

The nominal interest rate is 10%,the expected inflation rate is 5%,and the combined state-federal tax rate is 35%.The expected after-tax real interest rate is

What are the economic consequences of reductions in defense spending by the government? What happens to national saving,the interest rate,and investment?

An increase in the personal income tax rate on interest income will

An invention that raises the future marginal product of capital (in a closed economy)would cause an increase in desired investment,which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________.

Three factors that cause interest rates among different financial instruments to vary are

The desire to have a relatively even pattern of consumption over time is known as

If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a ________ in consumption and a ________ in saving,for someone who's a lender.

What is the marginal propensity to consume,and why is it always less than one?

At the start of the year,your firm's capital stock equaled $100 million,and at the end of the year it equaled $105 million.The average depreciation rate on your capital stock is 20%.Gross investment during the year equaled

With no inflation and a nominal interest rate (i)of .03,a person can trade off one unit of current consumption for ________ units of future consumption.

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-LM/AD-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

An invention that raises the future marginal product of capital (in a closed economy)would cause an increase in desired investment,which would cause the investment curve to shift to the and would cause the real interest rate to .

If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a in consumption and a in saving,for someone who's a lender.