Assignment 1: Hand in only Answer. Last Name. First Name. Chapter

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1 Assignment 1: Hand in only Answer Last Name First Name Chapter Chapter Chapter 3: Page 1

2 1. The two most important factors of production are: A) goods and services. B) labor and energy. C) capital and labor. D) saving and investment. 2. 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. 3. When factor supply is fixed and quantity of the factor is graphed on the horizontal axis while factor price is graphed on the vertical axis, the factor: A) supply curve is horizontal. B) supply curve is vertical. C) supply curve slopes up to the right. D) demand curve slopes up to the right. 4. A competitive, profit-maximizing firm hires labor until the: A) marginal product of labor equals the wage. B) price of output multiplied by the marginal product of labor equals the wage. C) real wage equals the real rental price of capital. D) wage equals the rental price of capital. 5. An increase in the supply of capital will: A) increase the real rental price of capital. B) decrease the real rental price of capital. C) increase the productivity of capital. D) decrease the real interest rate. 6. Economic profit is zero if: A) all factors are paid their marginal products and the law of diminishing returns is valid. B) all factors are paid their marginal products and there are constant returns to scale. C) all firms maximize profits and none are competitive. D) all firms maximize profits and all factors are paid their marginal products. Page 2

3 7. If output is described by the production function Y = AK 0.2 L 0.8, then the production function has: A) constant returns to scale. B) diminishing returns to scale. C) increasing returns to scale. D) a degree of returns to scale that cannot be determined from the information given. 8. In a Cobb-Douglas production function the marginal product of labor will increase if: A) the quantity of labor increases. B) the quantity of capital increases. C) capital's share of output increases. D) average labor productivity decreases. 9. In a closed economy, the components of GDP are: A) consumption, investment, government purchases, and exports. B) consumption, investment, government purchases, and net exports. C) consumption, investment, and government purchases. D) consumption and investment. 10. Consumption depends on disposable income, and investment depends on the real interest rate. A) positively; positively B) positively; negatively C) negatively; negatively D) negatively; positively 11. If the consumption function is given by the equation C = Y, the production function is Y = 50K 0.5 L 0.5, where K = 100 and L = 100, then C equals: A) 1,000. B) 2,500. C) 3,000. D) 5, Assume that the consumption function is given by C = (Y T), the tax function is given by T = t 0 + t 1 Y, and Y is 5,000. If t 1 decreases from 0.3 to 0.2, then consumption increases by: A) 85. B) 425. C) 500. D) 525. Page 3

4 13. Other things equal, an increase in the interest rate leads to: A) a decrease in the quantity of investment goods demanded. B) no change in the quantity of investment goods demanded. C) an increase in the quantity of investment goods demanded. D) sometimes an increase and sometimes a decrease in the quantity of investment goods demanded. 14. When economists speak of the interest rate, they mean: A) the rate on 90-day Treasury bills. B) the rate on 30-year government bonds. C) the prime rate on loans. D) no particular interest rate, since it is assumed that various interest rates tend to move up and down together. 15. The nominal interest rate is the: A) rate of interest that investors pay to borrow money. B) same as the real interest rate. C) rate of inflation minus the real rate of interest. D) real rate of interest minus the rate of inflation. 16. 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. 17. Assume that the investment function is given by I = 1,000 30r, where r is the real rate of interest (in percent). 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) All of the following actions increase government purchases of goods and services except the: A) federal government's sending a Social Security check to Betty Jones. B) federal government's sending a paycheck to the president of the United States. C) federal government's buying a Patriot missile. D) city of Boston's buying a library book. Page 4

5 19. In the classical model with fixed income, if the interest rate is too low, 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. 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. 21. National saving is: A) private saving. B) public saving. C) private saving plus public saving. D) private saving minus public saving. 22. Issuing bonds is called financing, while issuing stocks is called financing. A) debt; equity B) real; nominal C) capital; investment D) private; public 23. Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C = (Y T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2, r, where r is the real interest rate in percent. In this case, the equilibrium real interest rate is: A) 5 percent. B) 8 percent. C) 10 percent. D) 13 percent. 24. According to the model developed in Chapter 3, when taxes decrease without a change in government spending: A) consumption and investment both increase. B) consumption and investment both decrease. C) consumption increases and investment decreases. D) consumption decreases and investment increases. Page 5

6 25. In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving and private saving. A) increases; increases B) increases; does not change C) decreases; increases D) decreases; does not change Chapter 4: 1. All of the following are considered major functions of money except as a: A) medium of exchange. B) way to display wealth. C) unit of account. D) store of value. 2. When a pizza maker lists the price of a pizza as $10, this is an example of using money as a: A) store of value. B) unit of account. C) medium of exchange. D) flow of value. 3. To make a trade in a barter economy requires: A) currency. B) a check. C) scrip. D) a double coincidence of wants. 4. All of the following assets are included in M1 except: A) currency. B) demand deposits. C) traveler's checks. D) money market deposit accounts. 5. The definition of the transactions velocity of money is: A) money multiplied by prices divided by transactions. B) transactions divided by prices multiplied by money. C) money divided by prices multiplied by transactions. D) prices multiplied by transactions divided by money. Page 6

7 6. If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is times per year. A) 0.2 B) 2 C) 5 D) If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal: A) 10. B) 20,000. C) 200,000. D) 2,000, Consider the money demand function that takes the form (M/P) d = ky, where M is the quantity of money, P is the price level, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the rate of inflation in this country? A) 3 percent B) 7 percent C) 10 percent D) 13 percent 9. Percentage change in P is approximately equal to the percentage change in: A) M. B) M minus percentage change in Y. C) M minus percentage change in Y plus percentage change in velocity. D) M minus percentage change in Y minus percentage change in velocity. 10. The right of seigniorage is the right to: A) levy taxes on the public. B) borrow money from the public. C) draft citizens into the armed forces. D) print money. 11. Inflation tax means that: A) as the price level rises, taxpayers are pushed into higher tax brackets. B) as the price level rises, the real value of money held by the public decreases. C) as taxes increase, the rate of inflation also increases. D) in a hyperinflation, the chief source of tax revenue is often the printing of money. Page 7

8 12. If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must: A) increase by 2 percent. B) increase by 1 percent. C) remain constant. D) decrease by 1 percent. 13. Equilibrium in the market for goods and services determines the interest rate and the expected rate of inflation determines the interest rate. A) ex ante real; ex ante nominal B) ex post real; ex post nominal C) ex ante nominal; ex post real D) ex post nominal; ex post real 14. The opportunity cost of holding money is the: A) nominal interest rate. B) real interest rate. C) rate of inflation. D) prevailing Treasury bill rate. 15. According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices each year and give workers raises. A) more; larger B) more; smaller C) less; larger D) less; smaller 16. If inflation is 6 percent and a worker receives a 4 percent wage increase, then the worker's real wage: A) increased 4 percent. B) increased 2 percent. C) decreased 2 percent. D) decreased 6 percent. 17. A rate of inflation that exceeds 50 percent per month is typically referred to as a(n): A) inflation. B) hyperinflation. C) deflation. D) disinflation. Page 8

9 18. The major source of government revenue in most countries that experience a hyperinflation is: A) customs duties. B) personal taxes. C) seigniorage. D) borrowing. 19. An example of a nominal variable is the: A) money supply. B) quantity of goods produced in a year. C) relative price of bread. D) real wage. Page 9