Topics in Macroeconomics 2

Econ 2004

Practice Questions for Master Class 6 on Friday, May 8, 2009

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Next period's capital is equal to current-period investment

A) plus the amount of current capital left over after depreciation.
B) minus the amount of current period depreciation.
C) plus the amount of current period depreciation.
D) minus the amount of current capital left over after depreciation.

2) The marginal benefit from investment for a firm is equal to

MP'K - l + d MP'K + l - d MP'K + l + d MP'K - l - d
A) . B) . C) . D) .
(l + r) (l + r) (l + r) (l + r)

3) The demand for current consumption, as plotted against current income, shifts to the right due to all of the
following except
A) an increase in future income. B) a decrease in current taxes.
C) a decrease in future taxes. D) an increase in current income.

4) When drawn against the real interest rate, the output supply curve unambiguously shifts to the right if
A) future total factor productivity decreases. B) current or future taxes increase.
C) current total factor productivity decreases. D) current capital decreases.

5) If consumption demand increases and the labor supply decreases,

A) output may change either way. B) output decreases.
C) output does not change. D) output increases.

6) Any increase in the present value of taxes implies

A) an increase in lifetime wealth and an increase in the current labor supply.
B) an increase in lifetime wealth and a decrease in the current labor supply.
C) a decrease in lifetime wealth and a decrease in the current labor supply.
D) a decrease in lifetime wealth and an increase in the current labor supply.

7) When drawn against the real interest rate, the output demand curve shifts to the right when
A) future total factor productivity z' decreases. B) current total factor productivity z decreases.
C) current total factor productivity z increases. D) future total factor productivity z' increases.

8) A consumer may increase her saving by

A) working more hours and consuming fewer goods in the present period.
B) working fewer hours and consuming fewer goods in the present period.
C) working fewer hours and consuming more goods in the present period.
D) working more hours and consuming more goods in the present period.

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 9) When drawn against the current real wage, the labor demand curve shift to the right if
A) future capital increases. B) the interest rate increases.
C) total factor productivity increases. D) current taxes increase.

10) When drawn against the current wage, the current labor supply shifts to the right if
A) future taxes decrease. B) current taxes increase.
C) firms make more profits. D) total factor productivity increases.

11) In response to a temporary increase in government spending, the representative consumer consumes
A) more and takes less leisure. B) less and takes more leisure.
C) less and takes less leisure. D) more and takes more leisure.

12) The demand for current consumption, as plotted against the interest rate, shifts to the right due to all of the
following except
A) an increase in future income. B) a increase in future taxes.
C) a decrease in current taxes. D) an increase in current income.

13) When drawn against the real interest rate, the output supply curve is upward sloping because labor supply is
A) increasing in the real interest rate and labor demand is independent of the real interest rate.
B) decreasing in the real interest rate and labor demand is independent of the real interest rate.
C) independent of the real interest rate and labor demand is decreasing in the real interest rate.
D) independent of the real interest rate and labor demand is increasing in the real interest rate.

14) The condition, MRSC,C' = 1 + r, describes the representative consumer's

A) investment decision. B) future period work - leisure decision.
C) consumption - savings decision. D) current period work - leisure decision.

15) Any increase in the present value of dividends for the consumer implies
A) an increase in lifetime wealth and a decrease in current labor supply.
B) a decrease in lifetime wealth and an increase in current labor supply.
C) an increase in lifetime wealth and an increase in current labor supply.
D) a decrease in lifetime wealth and a decrease in current labor supply.

SHORT Problems

16) Consider the Real Intertemporal Model with Investment. Suppose a natural disaster destroys part of the current
capital stock. Representing the labour and the goods market in two graphs, determine the effects of this change
for aggregate output, current employment, the current real wage, the current interest rate, consumption and
investment.

17) Consider the Real Intertemporal Model with Investment. Suppose a breakthrough innovation permannently
increases productivity (z and z'). Representing the labour and the goods market in two graphs, determine the
effects of this change for aggregate output, current employment, the current real wage, the current interest rate,
consumption and investment.

18) Consider an increase in the Marginal Product of capital in the future. In the economy as a whole, how do
changes in the real interest rate ensure that real savings rise to match the increase in investment.

19) What are the effects of an increase in the depreciation rate in the Real Intertemporal Model with Investment?