Question 1

A small increase in the real interest rate will most likely

Accepted Answer

A) increase desired saving, but the effect will be relatively small. 
B) increase desired saving substantially. 
C) decrease desired saving substantially. 
D) decrease desired saving, but the effect will be relatively small.

Question 2

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.

Question 3

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.

Question 4

In the goods market equilibrium condition for a closed economy,the total demand for goods equals

Accepted Answer

A) Cd + Id 
B) Cd + Id + G 
C) Cd + Id - G 
D) Cd + G - Id

Question 5

Last year,Linus earned a salary of $25,000 and he spent $24,000,thus saving $1000.At the end of the year,he received a bonus of $1000 and he spent $500 of it,saving the other $500.What was his marginal propensity to consume?

Accepted Answer

A) 0.96 
B) 0.50 
C) 0.04 
D) 0.02

Question 6

The desired level of the capital stock will increase if the

Accepted Answer

A) user cost of capital increases. 
B) expected future marginal product of capital increases. 
C) effective tax rate increases. 
D) price of capital increases.

Question 7

The fraction of additional current income that a person consumes in the current period is known as the

Accepted Answer

A) consumption-smoothing motive. 
B) consumption deficit. 
C) saving rate. 
D) marginal propensity to consume.

Question 8

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) 0.03 
D) -0.03

Question 9

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 real after-tax interest rate?

Accepted Answer

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

Question 10

Jane wants to save $1000 of current income.With an IRA,no taxes are paid on income or interest until the money is withdrawn in five years.Without an IRA,taxes must be paid whenever income or interest is received.Jane's federal/state tax bracket is 35%,and the nominal interest rate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

The answer of Jane wants to save $1000 of current...

Question 11

An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by Cd = 3000 - 2000r + 0.10Y
Id = 1000 - 4000r
Where Y is output and r is the real interest rate.The real interest rate that clears the goods market is equal to

Accepted Answer

A) 1)25%. 
B) 2)50%. 
C) 8)33%. 
D) 25.00%.

Question 12

If the government cuts taxes today,issuing debt today and repaying the debt plus interest next year,a rational taxpayer will

Accepted Answer

A) spend the full amount of the tax cut today and reduce consumption next year. 
B) increase consumption today, before taxes go up next year. 
C) increase saving today, leaving consumption unchanged. 
D) leave a smaller gross bequest to her or his heirs.

Question 13

A firm has current and future marginal productivity of capital given by MPK = 10,000 - 2K + N,and marginal productivity of labor given by MPN = 50 - 2N + K.The price of capital is $5000,the real interest rate is 10%,and capital depreciates at a 15% rate.The real wage rate is $15.
(a)Calculate the user cost of capital.
(b)Find the firm's optimal amount of employment and the size of the capital stock.

Accepted Answer

The answer of A firm has current and future marginal...

Question 14

If consumers foresee future taxes completely,a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause

Accepted Answer

A) a rightward shift in the saving curve and a rightward shift in the investment curve. 
B) a shift in neither the saving nor the investment curve. 
C) a leftward shift in the saving curve, but no shift in the investment curve. 
D) no shift in the saving curve, but a rightward shift in the investment curve.

Question 15

A temporary decrease in government purchases would cause

Accepted Answer

A) a rightward shift in the saving curve and a leftward shift in the investment curve. 
B) a rightward shift in the saving curve and a rightward shift in the investment curve. 
C) a rightward shift in the saving curve, but no shift in the investment curve. 
D) no shift in the saving curve, but a leftward shift in the investment curve.

Question 16

If the substitution effect of the real interest rate on saving is smaller 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

Question 17

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

Accepted Answer

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

Question 18

How would each of the following affect Cheryl Shirker's current consumption and saving? Cheryl is a forward-looking consumer with no borrowing constraints.
(a)Cheryl's firm announces a reorganization plan,increasing Cheryl's future income dramatically.
(b)Cheryl's father,who had planned to leave her a large bequest,must spend all his wealth on medical bills after a prolonged illness.
(c)The real interest rate rises from its original level.Cheryl originally planned to have no assets for the future; that is,she planned to spend all her original assets and all her income when she was young,and planned to consume an amount equal to her future income when she was old.

Accepted Answer

The answer of How would each of the following affect...

Question 19

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 20

Tobin's q is equal to

Accepted Answer

A) the ratio of capital's market value to its replacement cost. 
B) the ratio of capital's replacement cost to its market value. 
C) the expected after-tax real interest rate. 
D) the stock market value of a firm.

Exam 4: Consumption, saving, and Investment

A small increase in the real interest rate will most likely

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

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

In the goods market equilibrium condition for a closed economy,the total demand for goods equals

Last year,Linus earned a salary of $25,000 and he spent $24,000,thus saving $1000.At the end of the year,he received a bonus of $1000 and he spent $500 of it,saving the other $500.What was his marginal propensity to consume?

The desired level of the capital stock will increase if the

The fraction of additional current income that a person consumes in the current period is known as the

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.

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 real after-tax interest rate?

An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by C^d= 3000 - 2000r + 0.10Y I^d= 1000 - 4000r Where Y is output and r is the real interest rate.The real interest rate that clears the goods market is equal to

If the government cuts taxes today,issuing debt today and repaying the debt plus interest next year,a rational taxpayer will

If consumers foresee future taxes completely,a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause

A temporary decrease in government purchases would cause

If the substitution effect of the real interest rate on saving is smaller 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.

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

Tobin's q is equal to

Exam 4: Consumption, saving, and Investment

A small increase in the real interest rate will most likely

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

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

In the goods market equilibrium condition for a closed economy,the total demand for goods equals

Last year,Linus earned a salary of $25,000 and he spent $24,000,thus saving $1000.At the end of the year,he received a bonus of $1000 and he spent $500 of it,saving the other $500.What was his marginal propensity to consume?

The desired level of the capital stock will increase if the

The fraction of additional current income that a person consumes in the current period is known as the

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.

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 real after-tax interest rate?

An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by Cd = 3000 - 2000r + 0.10Y Id = 1000 - 4000r Where Y is output and r is the real interest rate.The real interest rate that clears the goods market is equal to

If the government cuts taxes today,issuing debt today and repaying the debt plus interest next year,a rational taxpayer will

If consumers foresee future taxes completely,a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause

A temporary decrease in government purchases would cause

If the substitution effect of the real interest rate on saving is smaller 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.

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

Tobin's q is equal to

An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by C^d= 3000 - 2000r + 0.10Y I^d= 1000 - 4000r Where Y is output and r is the real interest rate.The real interest rate that clears the goods market is equal to

If the substitution effect of the real interest rate on saving is smaller 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.