1.

The level of national income in an economy is determined by its:

A.

factors of production and production function.

B.

real and nominal interest rate.

C.

government budget surplus or deficit.

D.

rate of economic and accounting profit.



2.

The two most important factors of production are:

A.

goods and services.

B.

labor and energy.

C.

capital and labor.

D.

saving and investment.



3.

A production function is a technological relationship between:

A.

factor prices and the marginal product of factors.

B.

factors of production and factor prices.

C.

factors of production and the quantity of output produced.

D.

factor prices and the quantity of output produced.



4.

If bread is produced by using a constant returns to scale production function, then if the:

A.

number of workers is doubled, twice as much bread will be produced.

B.

amount of equipment is doubled, twice as much bread will be produced.

C.

amounts of equipment and workers are both doubled, twice as much bread will be produced.

D.

amounts of equipment and workers are both doubled, four times as much bread will be produced.



5.

The price received by each factor of production for its services is determined by:

A.

demand for output and supply of factors.

B.

demand for factors and supply of output.

C.

demand and supply of output.

D.

demand and supply of factors.



6.

A competitive firm:

A.

is small relative to the market in which it trades.

B.

has to charge a lower price when it wants to sell more goods.

C.

has several large competitors with whom it engages in fierce competition.

D.

can set the wage at which it hires workers.



7.

The marginal product of labor is:

A.

output divided by labor input.

B.

additional output produced when one additional unit of labor is added.

C.

additional output produced when one additional unit of labor and one additional unit of capital are added.

D.

value of additional output when one dollar's worth of additional labor is added.



8.

The marginal product of capital is:

A.

output divided by capital input.

B.

additional output produced when one additional unit of capital is added.

C.

additional output produced when one additional unit of capital and one additional unit of labor are added.

D.

value of additional output when one dollar's worth of additional capital is added.



9.

According to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed:

A.

only to the labor used in production.

B.

partly between labor and capital used in production, with the surplus going to the owners of the firm as profits.

C.

equally between the labor and capital used in production.

D.

between the labor and capital used in production, according to their marginal productivities.



10.

If the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals:

A.

2,500.

B.

2,800.

C.

3,500.

D.

4,200.



11.

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by:

A.

0.15 unit.

B.

0.5 unit.

C.

0.85 unit.

D.

1 unit.



12.

Investment goods as measured in the GDP are purchased by:

A.

business firms alone.

B.

households alone.

C.

business firms and households.

D.

business firms, households, and governments.



13.

The real interest rate is the:

A.

rate of interest actually paid by consumers.

B.

rate of interest actually paid by banks.

C.

rate of inflation minus the nominal interest rate.

D.

nominal interest rate minus the rate of inflation.



14.

Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest. Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be:

A.

240.

B.

700.

C.

760.

D.

970.



15.

If government purchases exceed taxes minus transfer payments, then the government budget is:

A.

balanced.

B.

in deficit.

C.

in surplus.

D.

endogenous.



16.

In examining the impact of fiscal policy, it is assumed that:

A.

consumption, investment, and the interest rate are endogenous variables.

B.

consumption, investment, and the interest rate are exogenous variables.

C.

government purchases, taxes, and interest rates are endogenous variables.

D.

government purchases, taxes, and interest rates are exogenous variables.



17.

In the classical model with fixed output, the supply and demand for goods and services are balanced by:

A.

government spending.

B.

taxes.

C.

fiscal policy.

D.

the interest rate.



18.

The equation may be solved for the equilibrium level of:

A.

income.

B.

consumption.

C.

government purchases.

D.

the interest rate.



19.

In the classical model with fixed income, if the interest rate is too high, then investment is too ______ and the demand for output ______ the supply.

A.

high; exceeds

B.

high; falls short of

C.

low; exceeds

D.

low; falls short of



20.

In a closed economy, private saving equals:

A.

Y-C-G.

B.

Y-T-C.

C.

Y-I-C.

D.

Y-T.



21.

Public saving is:

A.

income minus consumption minus government spending.

B.

disposable income minus consumption.

C.

disposable income minus government spending.

D.

government revenue minus government spending.



22.

National saving is:

A.

private saving.

B.

public saving.

C.

private saving plus public saving.

D.

private saving minus public saving.



23.

The supply and demand for loanable funds determines the:

A.

real wage.

B.

real rental price of capital.

C.

real interest rate.

D.

nominal interest rate.



24.

According to the model developed in Chapter 3, when government spending increases without a change in taxes:

A.

consumption increases.

B.

consumption decreases.

C.

investment increases.

D.

investment decreases.



25.

Crowding out occurs when an increase in government spending ______ the interest rate and investment ______.

A.

increases; increases

B.

increases; decreases

C.

decreases; increases

D.

decreases; decreases



26.

In the classical model with fixed income a decrease in the real interest rate could be the result of a(n):

A.

increase in government spending.

B.

increase in desired investment.

C.

increase in taxes.

D.

decrease in taxes.



27.

If increased immigration raises the labor force, the neoclassical theory of distribution predicts:

A.

the real wage will rise and the real rental price of capital will fall.

B.

both the real wage and the real rental price of capital will fall.

C.

both the real wage and the real rental price of capital will rise.

D.

the real wage will fall and the real rental price of capital will rise.



28.

In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. By doing so:

A.

investment falls and the interest rate rises.

B.

investment rises and the interest rate falls.

C.

investment and the interest rate both fall.

D.

investment and the interest rate both rise.




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