ECON303exam2chp4

Question 1

When a person receives an increase in wealth, what is likely to happen to consumption and saving?

A. Consumption decreases and saving decreases.

B. Consumption increases and saving decreases.

C. Consumption increases and saving increases.

D. Consumption decreases and saving increases.

Answer 1

B. Consumption increases and saving decreases.

Answer: B

Question 2

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

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

Answer 2

A. default risk, maturity, and taxability.

Question 3

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.

A. -.03
B. .03
C. 0.97
D. 1.03

Answer 3

D. 1.03

Question 4

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?

A. .02
B. .50
C. .96
D. .04

Answer 4

B. .50

Question 5

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

A. leave a smaller gross bequest to her or his heirs.

B. increase saving today, leaving consumption unchanged.

C. spend the full amount of the tax cut today and reduce consumption next year.

D. increase consumption today, before taxes go up next year.

Answer 5

B. increase saving today, leaving consumption unchanged

Question 6

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?

A. 3%

B. 0%

C. 1%

D. 2%

Answer 6

D. 2%

Question 7

Aunt Agatha has just left her nephew $5000. The most likely response is for her nephew to

A. decrease current consumption, but increase future consumption.

B. increase future consumption, but not current consumption.

C. increase current consumption, but not future consumption.

D. increase both current consumption and future consumption.

Answer 7

D. increase both current consumption and future consumption.

Question 8

For a borrower, an increase in the real interest rate will lead to
A. lower current consumption and less borrowing.
B. higher current consumption and less saving.
C. higher current consumption and less borrowing.
D. lower current consumption and less saving.

Answer 8

A. lower current consumption and less borrowing.

Question 9

An increase in expected future output while holding today’s output constant would

A. increase today’s desired consumption and increase desired national saving.

B. decrease today's desired consumption and increase desired national saving.	

C. increase today's desired consumption and decrease desired national saving.	

D. decrease today's desired consumption and decrease desired national saving.

Answer 9

C. increase today’s desired consumption and decrease desired national saving.

Question 10

Desired national saving equals

    A. Cd + Id + G.	

B. Y - Id - G.	

C. Id + G.	

D. Y - Cd - G.

Answer 10

D. Y - Cd - G.

Question 11

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?

   A. 400	

B. 950	

C. 550	

D. 700

Answer 11

C. 550

Question 12

The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut

A. causes a current account deficit.

B. raises interest rates.	

C. causes inflation.	

D. doesn't affect consumption.

Answer 12

D. doesn’t affect consumption.

Question 13

The substitution effect of a decrease in real interest rates is to cause a consumer to

A. decrease future consumption and increase current consumption.

B. increase current consumption and increase saving.	

C. increase future consumption and decrease current consumption.	

D. decrease current consumption and increase saving.

Answer 13

A. decrease future consumption and increase current consumption.

Question 14

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.

A. rise; rise

B. fall; fall	

C. fall; rise	

D. rise; fall

Answer 14

C. fall; rise

Question 15

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

A. remain unchanged.	

B. increase if the person was a lender and decrease if the person was a borrower.	

C. increase.	

D. decrease.

Answer 15

C. increase.

Question 16

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

  A. saving rate.	

B. consumption-smoothing motive.	

C. consumption deficit.	

D. marginal propensity to consume.

Answer 16

D. marginal propensity to consume.

Question 17

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.

 A. rise; fall	

B. rise; rise	

C. fall; fall	

D. fall; rise

Answer 17

A. rise; fall

Question 18

The stock market just crashed; the Dow Jones Industrial Average fell by 750 points. You would expect the effect on aggregate consumption to be the largest if which of the following facts was true?

A. Most stocks were owned by insurance companies.	

B. Many individuals had invested in the stock market immediately prior to the crash.	

C. Most stocks were owned by pension funds that invested in the market.	

D. The crash had been preceded by a large run-up in the price of stocks.

Answer 18

B. Many individuals had invested in the stock market immediately prior to the crash.

Question 19

Desired national saving would decrease unambiguously if there were

A. an increase in both expected future output and the expected real interest rate.

B. a fall in both government purchases and expected future output.	

C. an increase in expected future output and a decrease in government purchases.	

D. a decrease in current output and a decrease in taxes.

Answer 19

D. a decrease in current output and a decrease in taxes.

Question 20

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

  A. the substitution effect.	

B. the consumption-smoothing motive.	

C. forced saving.	

D. excess sensitivity.

Answer 20

B. the consumption-smoothing motive.

Question 21

Aunt Agatha has just left her nephew $5000. The most likely response is for her nephew to

A. decrease current consumption, but increase future consumption.	

B. increase future consumption, but not current consumption.	

C. increase current consumption, but not future consumption.	

D. increase both current consumption and future consumption.

Answer 21

D. increase both current consumption and future consumption.

Question 22

If Claudette gets a permanent increase in her income of $1000 per year, she saves an extra $200 this year and consumes an extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved ________ of the extra income.

  A. exactly $200	

B. less than $200	

C. more than $200	

D. none

Answer 22

C. more than $200

Question 23

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

A. lower current consumption and less borrowing.	

B. higher current consumption and less saving.	

C. higher current consumption and less borrowing.	

D. lower current consumption and less saving.

Answer 23

A. lower current consumption and less borrowing.

Question 24

Question 12 of 20 0.0/ 3.0 Points
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?

  A. 3%	

B. 0%	

C. 1%	

D. 2%

Answer 24

D. 2%

Question 25

Desired national saving would increase unambiguously if there were A. an increase in both expected future output and government purchases. B. an increase in both expected future output and the expected real interest rate. C. a fall in both government purchases and expected future output. D. an increase in both current output and expected future output.

Answer 25

C. a fall in both government purchases and expected future output.

Question 26

When a person receives an increase in wealth, what is likely to happen to consumption and saving? A. Consumption decreases and saving decreases. B. Consumption increases and saving decreases. C. Consumption increases and saving increases. D. Consumption decreases and saving increases.

Answer 26

B. Consumption increases and saving decreases.

Question 27

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. A. -.03 B. .03 C. 0.97 D. 1.03

Answer 27

D. 1.03

Question 28

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. A. rise; fall B. rise; rise C. fall; fall D. fall; rise

Answer 28

A. rise; fall

Question 29

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 A. 5.00%. B. 6.50%. C. 3.25%. D. 1.50%

Answer 29

D. 1.50%.

Question 30

If the government cuts taxes today, issuing debt today and repaying the debt plus interest next year, a rational taxpayer will A. leave a smaller gross bequest to her or his heirs. B. increase saving today, leaving consumption unchanged. C. spend the full amount of the tax cut today and reduce consumption next year. D. increase consumption today, before taxes go up next year.

Answer 30

B. increase saving today, leaving consumption unchanged.

Question 31

When a person gets an increase in current income, what is likely to happen to consumption and saving? A. Consumption decreases and saving decreases. B. Consumption increases and saving decreases. C. Consumption decreases and saving increases. D. Consumption increases and saving increases.

Answer 31

D. Consumption increases and saving increases.

Question 32

A curve that connects all the consumption combinations that yield the same level of utility is known as A. a yield curve. B. an indifference curve. C. a budget line. D. an isoquant.

Answer 32

B. an indifference curve.

Question 33

An increase in expected future output while holding today's output constant would A. increase today's desired consumption and increase desired national saving. B. decrease today's desired consumption and increase desired national saving. C. increase today's desired consumption and decrease desired national saving. D. decrease today's desired consumption and decrease desired national saving.

Answer 33

C. increase today's desired consumption and decrease desired national saving.

Question 34

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? A. 3% B. 0% C. 1% D. 2%

Answer 34

D. 2%

Question 35

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? A. .02 B. .50 C. .96 D. .04

Answer 35

B. .50

Question 36

Which of the factors listed below might cause the Ricardian equivalence proposition to be violated? A. There may be constraints on the level of government taxation. B. There may be international capital inflows and outflows. C. There may be constraints on the level of government spending. D. Consumers may not understand that an increase in government borrowing today is likely to lead to higher future taxes.

Answer 36

D. Consumers may not understand that an increase in government borrowing today is likely to lead to higher future taxes.

Question 37

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

Answer 37

C. increase.

Question 38

When a person gets an increase in current income, what is likely to happen to consumption and saving? A. Consumption decreases and saving decreases. B. Consumption increases and saving decreases. C. Consumption decreases and saving increases. D. Consumption increases and saving increases.

Answer 38

D. Consumption increases and saving increases.

Question 39

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 A. 5.00%. B. 6.50%. C. 3.25%. D. 1.50%.

Answer 39

D. 1.50%.

Question 40

The yield curve generally slopes upward because A. longer maturity bonds typically pay lower interest rates than shorter maturity bonds. B. longer maturity bonds typically pay higher interest rates than shorter maturity bonds. C. longer maturity bonds are not taxable. D. shorter maturity bonds have more default risk.

Answer 40

B. longer maturity bonds typically pay higher interest rates than shorter maturity bonds.

Question 41

Desired national saving would increase unambiguously if there were A. an increase in both expected future output and government purchases. B. an increase in both expected future output and the expected real interest rate. C. a fall in both government purchases and expected future output. D. an increase in both current output and expected future output.

Answer 41

C. a fall in both government purchases and expected future output.

Question 42

The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve A. causes the total amounts of saving and investment to fall. B. raises the profitability of investment for firms. C. causes the amount of firms' investment to increase. D. increases the total amount of saving because of the increase in the real interest rate.

Answer 42

A. causes the total amounts of saving and investment to fall.

Question 43

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. a shift in neither the saving nor the investment curve. B. a rightward shift in the saving curve and a rightward shift in 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.

Answer 43

A. a shift in neither the saving nor the investment curve.

Question 44

A temporary supply shock, such as a drought, would A. decrease both the marginal product of capital and the marginal product of labor in the long-term future. B. increase the marginal product of capital and increase desired investment. C. decrease the marginal product of capital and decrease desired investment. D. have no effect on the desired investment curve.

Answer 44

D. have no effect on the desired investment curve.

Question 45

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to A. the left and increase the real interest rate. B. the right and increase the real interest rate. C. the left and decrease the real interest rate. D. the right and decrease the real interest rate.

Answer 45

D. the right and decrease the real interest rate.

Question 46

When desired national saving equals desired national investment, what market is in equilibrium? A. The goods market B. The money market C. The stock market D. The foreign exchange market

Answer 46

A. The goods market

Question 47

If the stock market booms and people feel wealthier, then the real interest rate ________ and investment ________. A. rises; increases B. falls; declines C. falls; increases D. rises; declines

Answer 47

D. rises; declines

Question 48

A temporary decrease in government purchases would cause A. a rightward shift in the saving curve and a rightward shift in the investment curve. B. no shift in the saving curve, but a leftward shift in the investment curve. C. a rightward shift in the saving curve and a leftward shift in the investment curve. D. a rightward shift in the saving curve, but no shift in the investment curve.

Answer 48

D. a rightward shift in the saving curve, but no shift in the investment curve.

Question 49

If consumers believe that next year a recession will occur, then the real interest rate ________ and investment ________. A. rises; increases B. falls; increases C. rises; declines D. falls; declines

Answer 49

B. falls; increases

Question 50

Onerous regulations on businesses that take effect next year reduce businesses' expected future marginal product of capital. As a result, the real interest rate ________ and saving ________. A. falls; increases B. rises; declines C. falls; declines D. rises; increases

Answer 50

C. falls; declines

Question 51

If the government reduces the effective tax rate on capital, then the real interest rate ________ and saving ________. A. rises; declines B. rises; increases C. falls; declines D. falls; increases

Answer 51

B. rises; increases

Question 52

An increase in the expected real interest rate tends to A. raise desired investment only. B. raise desired saving, but lower desired investment. C. raise both desired saving and desired investment. D. raise desired saving only.

Answer 52

B. raise desired saving, but lower desired investment.

Question 53

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%. A. Machine C B. Machine A C. Machine B D. Machine D

Answer 53

D. Machine D

Question 54

If the rate of depreciation increases, then user cost ________ and the desired capital stock ________. A. rises; falls B. falls; falls C. rises; rises D. falls; rises

Answer 54

A. rises; falls

Question 55

Tobin's q is equal to 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 stock market value of a firm D. the expected after-tax real interest rate.

Answer 55

A. the ratio of capital's market value to its replacement cost.

Question 56

A firm should invest more if Tobin's q A. is more than one. B. equals zero. C. is less than one. D. equals one.

Answer 56

A. is more than one.

Question 57

Cummins, Hubbard, and Hassett found that investment responded to a tax change that affected the user cost of capital, with an elasticity of A. -1. B. -0.25. C. -0.66. D. 0.

Answer 57

C. -0.66.

Question 58

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment? A. $2.5 million B. $1.5 million C. $2.0 million D. $3.5 million

Answer 58

B. $1.5 million

Question 59

A technological improvement will A. have no effect on the desired capital stock. B. increase the desired capital stock. C. have the same effect on the desired capital stock as an increase in corporate taxes. D. decrease the desired capital stock.

Answer 59

B. increase the desired capital stock.

Question 60

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? A. $20,000 B. $24,000 C. $30,000 D. $27,000

Answer 60

B. $24,000

Question 61

If the stock market value of a firm is $10 million and the firm owns $15 million of capital, then Tobin's q equals A. 4. B. 3/2. C. 1. D. 2/3.

Answer 61

D. 2/3.

Question 62

What is the difference between gross investment and net investment? A. Net investment = gross investment minus taxes B. Net investment = gross investment minus inventory accumulation C. Net investment = gross investment minus net factor payments D. Net investment = gross investment minus depreciation

Answer 62

D. Net investment = gross investment minus depreciation

Question 63

Calculate the user cost of capital of a machine that costs $5000 and depreciates at a rate of 25%, when the nominal interest rate is 10% and the expected inflation rate is 5%. A. $1500 B. $5000 C. $150 D. $500

Answer 63

A. $1500

Question 64

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%. A. $25,000 B. $3000 C. $29,000 D. $28,000

Answer 64

D. $28,000

Question 65

Cummins, Hubbard, and Hassett studied the effects of taxes on investment by A. seeing if investment spending is correlated with taxes on investment. B. raising tax rates on equipment and reducing tax rates on structures. C. examining what happened to investment when major tax reforms took place. D. raising tax rates on certain businesses and testing their reaction.

Answer 65

C. examining what happened to investment when major tax reforms took place.

Question 66

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

Answer 66

A. $25 million.

Question 67

The relationship between stock prices and firms' investments in physical capital is captured by what theory? A. Yield-curve theory B. Keynesian theory C. User-cost-of-capital theory D. q theory

Answer 67

D. q theory

Question 68

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

Answer 68

A. Lowers it, because the user cost of capital is now higher

Question 69

You are trying to figure out how much capacity to add to your factory. You will increase capacity as long as A. the expected marginal product of capital is greater than or equal to the marginal product of capital. B. the expected marginal product of capital is greater than or equal to the expected marginal product of labor. C. the expected marginal product of capital is greater than or equal to the user cost of capital. D. the expected marginal product of capital is positive.

Answer 69

C. the expected marginal product of capital is greater than or equal to the user cost of capital.

Question 70

When a company must consider taxes in determining investment, its desired capital stock is chosen such that A. t x MPKf = uc. B. MPKf = t x uc. C. MPKf = uc/(1-t). D. MPKf = uc(1-t).

Answer 70

C. MPKf = uc/(1-t).

Question 71

If the stock market value of a firm is $10 million and the firm owns $15 million of capital, then Tobin's q equals A. 4. B. 3/2. C. 1. D. 2/3.

Answer 71

D. 2/3.

Question 72

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

Answer 72

D. $5 million.

Question 73

Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent decline in the expected real interest rate now has what effect on your desired capital stock? A. Lowers it, because the user cost of capital is now higher B. Raises it, because the user cost of capital is now lower C. Lowers it, because the future marginal productivity of capital is lower D. Raises it, because the future marginal productivity of capital is higher

Answer 73

B. Raises it, because the user cost of capital is now lower

Question 74

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a 25% rate, 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 5%. A. Machine C B. Machine B C. Machine A D. Machine D

Answer 74

B. Machine B

Question 75

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? A. $20,000 B. $24,000 C. $30,000 D. $27,000

Answer 75

B. $24,000