Question

Suppose you build bird houses. One day, you double the time you spend building and double the wood, nails, paint, and all the other inputs in order to build twice as many bird houses. What kind of production function is this?

Question 6 options:

	increasing returns to scale
	constant returns to scale
	decreasing returns to scale
	zero returns to scale

Question 7 (1 point)

If a country's saving rate increases, what happens in the long run?

Question 7 options:

	Income increases.
	Productivity decreases.
	Productivity increases faster.
	Income decreases faster.

Question 8 (1 point)

Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less capital, and so less real GDP per person. Suppose that both increase their saving rate from 3 percent to 4 percent. What will happen in the long run?

Question 8 options:

	Both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with less capital.
	Both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with less capital.
	Both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with more capital.
	Both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with more capital.

Question 9 (1 point)

What would most likely happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

Question 9 options:

	The supply of and demand for loanable funds would shift to the left.
	The supply of loanable funds would shift to the right, and the demand for loanable funds would shift to the left.
	The supply of and demand for loanable funds would shift to the right.
	The supply of loanable funds would shift to the right, and the demand for loanable funds will remain unchanged.

Question 10 (1 point)

What would an increase in the budget deficit most likely cause?

Question 10 options:

	a shortage of loanable funds at the original interest rate, which would lead to rising interest rates
	a surplus of loanable funds at the original interest rate, which would lead to rising interest rates
	a surplus of loanable funds at the original interest rate, which would lead to falling interest rates
	a shortage of loanable funds at the original interest rate, which would lead to falling interest rates

Answer 1

Question 6. Suppose you build bird houses. One day, you double the time you spend building and double the wood, nails, paint, and all the other inputs in order to build twice as many bird houses. This is constant returns to scale production function as in this case A proportional increase in all inputs leads to an increase in output of the same proportion. Or, if all inputs are doubled, output will double, too.

Question 7. If a country's saving rate increases, its Productivity increases faster in the long run. This is because accumulation of capital is subject to diminishing returns: The more capital an economy has, the less additional output the economy gets from an extra unit of capital.

Question 8. Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less capital, and so less real GDP per person. Suppose that both increase their saving rate from 3 percent to 4 percent. So in the long run, Both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with less capital.

Question 9.  If the government were to decrease the tax rate on interest income, as a result in the lonable funds market, The supply of loanable funds would shift to the right, and the demand for loanable funds will remain unchanged. This is because the increased tax benefits derived from saving would encourage more people to reduce their current consumption levels and increase their saving. This will cause the supply of loanable funds to increase (shift to the right.)

Question 10. If there is an increase in the budget deficit, it means that government is in need of loans and hence they will demand from the market. This increases the demand for lonable funds which will shift the demand curve right and at new demand there will be : a shortage of loanable funds at the original interest rate, which would lead to rising interest rates.