ECON 208 || QUESTIONS WITH SOLVED
SOLUTIONS!!!
An increase in the personal income tax rate on interest income will correct answers increase
desired saving because the expected real after-tax interest rate falls.
An increase in expected future output while holding today's output constant would correct
answers increase today's desired consumption and decrease desired national saving.
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? correct answers .50
When a person gets an increase in current income, what is likely to happen to consumption
and saving? correct answers Consumption increases and saving increases
When a person receives an increase in wealth, what is likely to happen to consumption and
saving? correct answers Consumption increases and saving decreases.
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? correct answers 2%
The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut
correct answers doesn't affect consumption.
Which of the factors listed below might cause the Ricardian equivalence proposition to be
violated? correct answers Consumers may not understand that an increase in government
borrowing today is likely to lead to higher future taxes.
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%. correct answers ?
The user cost of capital is given by the following formula, where pK is the real price of
capital goods, d is the depreciation rate, and r is the expected real interest rate. correct
answers uc = (r + d)pK
The desired level of the capital stock will increase if the correct answers expected future
marginal product of capital increases.
An increase in the expected real interest rate will correct answers decrease the desired capital
stock.
If the rate of depreciation increases, then user cost ________ and the desired capital stock
________. correct answers rises; falls
Tobin's q is equal to correct answers the ratio of capital's market value to its replacement cost.
, If the stock market value of a firm is $10 million and the firm owns $15 million of capital,
then Tobin's q equals correct answers 2/3
A firm should invest more if Tobin's q correct answers more than one
A technological improvement will correct answers increase the desired capital stock.
What is the difference between gross investment and net investment? correct answers Net
investment = gross investment minus depreciation
In the goods market equilibrium condition for a closed economy, the total demand for goods
equals correct answers Cd + Id + G
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 correct answers 8.33%.
An economy has government purchases of 1000. Desired national saving and desired
investment are given by
Sd = 200 + 5000r + 0.10Y - 0.20G
Id = 1000 - 4000r
When the full-employment level of output equals 5000, then the real interest rate that clears
the goods market will be correct answers 5.56%.
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 correct answers the right and
decrease the real interest rate.
A temporary decrease in government purchases would cause correct answers a rightward shift
in the saving curve, but no shift in the investment curve.
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 ________. correct answers right;
increase
If the government reduces the effective tax rate on capital (in a closed economy), then the
real interest rate ________ and saving ________. correct answers rise; increase
The entire sequence of a decline in aggregate economic activity followed by recovery,
measured from peak to peak or trough to trough is a correct answers business cycle.
SOLUTIONS!!!
An increase in the personal income tax rate on interest income will correct answers increase
desired saving because the expected real after-tax interest rate falls.
An increase in expected future output while holding today's output constant would correct
answers increase today's desired consumption and decrease desired national saving.
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? correct answers .50
When a person gets an increase in current income, what is likely to happen to consumption
and saving? correct answers Consumption increases and saving increases
When a person receives an increase in wealth, what is likely to happen to consumption and
saving? correct answers Consumption increases and saving decreases.
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? correct answers 2%
The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut
correct answers doesn't affect consumption.
Which of the factors listed below might cause the Ricardian equivalence proposition to be
violated? correct answers Consumers may not understand that an increase in government
borrowing today is likely to lead to higher future taxes.
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%. correct answers ?
The user cost of capital is given by the following formula, where pK is the real price of
capital goods, d is the depreciation rate, and r is the expected real interest rate. correct
answers uc = (r + d)pK
The desired level of the capital stock will increase if the correct answers expected future
marginal product of capital increases.
An increase in the expected real interest rate will correct answers decrease the desired capital
stock.
If the rate of depreciation increases, then user cost ________ and the desired capital stock
________. correct answers rises; falls
Tobin's q is equal to correct answers the ratio of capital's market value to its replacement cost.
, If the stock market value of a firm is $10 million and the firm owns $15 million of capital,
then Tobin's q equals correct answers 2/3
A firm should invest more if Tobin's q correct answers more than one
A technological improvement will correct answers increase the desired capital stock.
What is the difference between gross investment and net investment? correct answers Net
investment = gross investment minus depreciation
In the goods market equilibrium condition for a closed economy, the total demand for goods
equals correct answers Cd + Id + G
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 correct answers 8.33%.
An economy has government purchases of 1000. Desired national saving and desired
investment are given by
Sd = 200 + 5000r + 0.10Y - 0.20G
Id = 1000 - 4000r
When the full-employment level of output equals 5000, then the real interest rate that clears
the goods market will be correct answers 5.56%.
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 correct answers the right and
decrease the real interest rate.
A temporary decrease in government purchases would cause correct answers a rightward shift
in the saving curve, but no shift in the investment curve.
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 ________. correct answers right;
increase
If the government reduces the effective tax rate on capital (in a closed economy), then the
real interest rate ________ and saving ________. correct answers rise; increase
The entire sequence of a decline in aggregate economic activity followed by recovery,
measured from peak to peak or trough to trough is a correct answers business cycle.
