Test 2-B

Question 1

A mathematical expression relating the amount of output produced to quantities of capital and labor utilized is the _______.

Answer 1

production function

Question 2

At the national level, an increase in current output raises both desired consumption and desired national savings. T/F?

Answer 2

True

Question 3

At the national level, an increase in expected future income raises desired consumption. T/F?

Answer 3

True

Question 4

At the national level, an increase in wealth causes desired saving to rise. T/F?

Answer 4

False

Question 5

Overall, the empirical evidence from many studies suggest that an increase in the real interest rate reduces desired national savings and increases desired consumption, but not by very much. T/F?

Answer 5

False

Question 6

At the national level, the Ricardian equivalence proposition says that a cut in taxes will boost consumption expenditure in the economy. T/F?

Answer 6

False

Question 7

The user cost of capital is the sum of the depreciation cost and the interest cost. T/F?

Answer 7

True

Question 8

If the expected future marginal product of capital is unchanged when there is an increase in the user cost of capital, then there will be a reduction in the amount of capital that businesses desire to use in their operations. T/F?

Answer 8

True

Question 9

If the expected future marginal product of capital is unchanged when there is a reduction in the taxation of capital, as measured by the effective tax rate, then there will be an increase in the amount of capital that business desire to use in their operations. T/F?

Answer 9

True

Question 10

Gross investment mine depreciation equals net investment, or the change in the capital stock. T/F?

Answer 10

True

Question 11

An increase in the effective tax rate lowers the user cost of capital. T/F?

Answer 11

False

Question 12

Gross investment equals net investment plus depreciation. T/F?

Answer 12

True

Question 13

In a closed economy, national saving is equal to the total income of the economy minus spending to satisfy current needs. T/F?

Answer 13

True

Question 14

According to Okun’s law, a 1% point increase in the unemployment rate in the U.S. is associated with a 4% drop in the U.S. output of goods and services. T/F?

Answer 14

False

Question 15

Structural unemployment occurs because some workers don’t have the skills needed to obtain long-term employment. T/F?

Answer 15

True

Question 16

The marginal propensity to consume (MPC) is the amount by which consumption rises when current income rises by one unit. T/F?

Answer 16

True

Question 17

The real rate of interest is equal to the nominal rate of interest plus the rate of inflation. T/F?

Answer 17

False

Question 18

A small increase in the real interest rate will most likely

Answer 18

increase desired saving, but the effect will be relatively small

Question 19

The labor supply curve will shift outward to the right when there is an:

Answer 19

increase in the working-age population

Question 20

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

Answer 20

will cause future taxes to increase but will have no real economic effects.

Question 21

The desired level of the capital stock will increase if the

Answer 21

expected future marginal product of capital increases

Question 22

DVD player cost $500, depreciate @ 25%/yr, borrow @ 10% or receive 6% for deposit, inflation @ 5%. Find user cost of capital for 1st year.

Answer 22

$130.

Question 23

Calculate the user cost of capital of a machine that costs $10,000 and depreciates at a 10% rate, when the nominal interest rate is 6% and the expected inflation rate is 3%

Answer 23

$1,300

Question 24

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

Answer 24

not change its investment spending on capital goods

Question 25

Equilibrium in the labor market determines

Answer 25

the real wage and productivity

Question 26

An increase in total factor productivity will

Answer 26

increase the full-employment level output

Question 27

In the production function Y=AF(K,N), A is

Answer 27

total factor productivity

Question 28

Because of diminishing marginal productivity

Answer 28

the labor demand curve is negatively sloped

Question 29

The marginal product of labor

Answer 29

declines as more labor is added to the production process

Question 30

In the diagram of the production function, a beneficial supply shock is shown by

Answer 30

change in the total capital of the economy and in the amount of labor that firms employ occur quickly

Question 31

Changes in the total capital stock of the economy occur slowly, while changes in the amount of labor that firms employ occur quickly

Answer 31

True

Question 32

A favorable supply shock would

Answer 32

shift the production function up and increase marginal products at every level of employment

Question 33

If a country’s working-age population declines and its wealth increases, then the labor supply curve

Answer 33

shifts to the left