Question

Each question can have more than 1 correct answer, Circle each answer that applies.

1) Assume that labor, capital, technology, tax revenue (payments) and government expenditures are fixed. Which of the following is (are) true? Y = C + I + G,   C = mpc(Y-T),   I = I(r)

a) An increase in government expenditures will cause the real rate of interest to fall and investment to rise.

b) An increase in tax payments will reduce consumption.

c) An increase in the marginal propensity to consume will reduce investment.

d) An increase in tax revenue will decrease public savings.

2) Which of the following is (are) true concerning the marginal productivity of labor (MPL).

a) The expression f(K, L+1) – f(K,L) represents the MPL.

b) The sequence [f(K, L+1) – f(K,L)], [f(K, L+2) – f(K,L+1)], [f(K, L+3) – f(K,L+2)] explains why the labor demand curve is downward sloping.

c) If the MPL exceeds the real wage, we should expect employment to increase.

d) An increase in capital should decrease the marginal product of labor.

3) Which of the following is (are) true? M = ((cd +1)/(cd +rd))B, where M is the money supply, cd is the currency deposit ratio, rd is the reserve deposit ratio and B is the monetary base.

a) An increase in the currency deposit ratio should increase excess reserves and reduce the money supply.

b) An open market purchase of securities or bonds should have a larger impact on the money supply if the reserve deposit ratio falls.

c) An increase in the reserve deposit ratio should cause a decrease in the price level.

d) An increase in the monetary base will increase the ability of banks to lend money.

Answer 1

1) b) An increase in tax payments will reduce consumption.

C = MPC(Y - T)

Increase in T causes decrease in C.

c) An increase in the marginal propensity to consume will reduce investment.

Increase in MPC causes increase in consumption which means people invest less money.

2) a) The expression f(K, L+1) – f(K,L) represents the MPL.

This expression shows increase in product when one more labor is added.

c) If the MPL exceeds the real wage, we should expect employment to increase.

MPL > Real wage means output produced by additional worker is greater than the real wage of worker. This implies firm is having profit in hiring more workers. So, employment increases.

3) c) An increase in the reserve deposit ratio should cause a decrease in the price level.

Increase in reserve deposit ratio means banks have to keep more money with themselves and lend less amount. Less number of loans means money supply reduces which decreases price level.

d) An increase in the monetary base will increase the ability of banks to lend money.