Desired national saving equals
Y-C(d)-G
With no inflation and a nominal interest rat (i) of .03, a person can trade off one unit of current consumption for ____ units of future consumption
1.03
The desire to have a relatively even pattern of consumption over time is known as
the consumption-smoothing motive
When a person gets an increase in current income, what is likely to happen to consumption and saving?
Consumption increases and saving increases
Last year, Linus earned a salary of $25,000 and he spent $25,000, thus saving $1,000. 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 consumer?
.50
The fraction of additional current income that a person consumes in the current period is known as the the
maringal propensity to consume
An increase in expected future output while holding today's output constant would
increase today's desired consumption and decrease desired national saving
When a person receives an increase in wealth, what is likely to happen to consumption and saving?
Consumption increases and saving decreases
Aunt Agatha has just left her nephew $5000. The most likely response is for her nephew to
increase both current consumption and future consumption
The stock market just crashed; the Down Jones Industrial Average fell by 750 points. You would expect the effect on aggregate consumption to be the largest if which of the following facts was true?
Many individuals had invested in the stock market immediately prior to the crash
If the substitution effect of the real interest rate on saving is (larger) than the income effect on the real interest rate on saving, then a rise in the real interest rate leads to a___ in consumption and a___ in saving, for someone who's a lender
fall; rise
If the substitution effect of the real interest rate on saving is (smaller) than the income effect on the real interest rate on saving, then a rise in the real interest rate leads to a___ in consumption and a___ in saving, for someone who's a lender
rise; fall
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
2%
The nominal interest rat is 10%, the expected inflation rate is 5%, and the combined stat-federal tax rate is 35%. The expected after-tax real interest rate is
1.50%
Three factors that cause interest rates among different financial instruments to vary are
default risk, maturity, and taxability
If an investor has a tax rate on interest income of 25% and the inflation rate is 4%, which bond has the lowest expected after-tax real interest rate?
A treasury bond paying 7%
The yield curve shows
the interest rates on bonds of different maturities
Desired national saving would increase unambiguously if there were
a fall in both government purchases and expected future output
The Ricardian equivalence proposition suggest that a government deficit caused by a tax cut
doesn't affect consumption
If the government cuts taxes today, issuing debt today and repaying the debt plus interest next year, a rational taxpayer will
increase saving today, leaving consumption unchanged
Which of the factors listed below might cause the Ricardian equivalence proposition to be violated?
Consumers may not understand that an incrase in government borrowing today is likely ot lead to higher future taxes
The user cost of capital is given by the following formula, where p(k) is the real price of capital goods, d is the depreciation rate, and r is the expected real interest rate
uc=(r+d)P(k)
Which of the following machines has the lowest user cost? Machine A costs $15000 and depreciates at a rate of 25%; Machine B costs $10000 and depreciates at a rate of 20%; Machine C costs $20000 and depreciates at a rate of 10%; Machine D costs $17000 and
Machine B
Which of the following machines has the lowest user cost? Machine A costs $15000 and depreciates at a rate of 25%; Machine B costs $10000 and depreciates at a rate of 20%; Machine C costs $20000 and depreciates at a rate of 10%; Machine D costs $17000 and
Machine D
Calculate the user cost of capital of a machine that costs $5,000 and depreciates at rate of 25%, when the expected real interest rate is 5%
$1500
Calculate the user cost of capital of a machine that costs $5,000 and depreciates at rate of 25%, when the nominal interest rate is 10% and the expected inflation rate is 5%
$1500
Calculate the user cost of capital of a machine that costs $100,000 and depreciates at rate of 25%, when the nominal interest rate is 4% and the expected inflation rate is 1%
$28,000
You are trying to figure out how much capacity to add to your factory. You will increase capacity as long as
the expected marginal product of capital is greater than or equal to the user cost of capital.
The relationship between stock prices and firm's investment in physical capital is capture by what theory
q theory
Tobin's q is equal to
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
2/3
A firm should invest more if Tobin's q
is more than one
A technological improvement will
increase the desired capital stock
Suppose your company is in equilibrium, with its capital stocka t its desired level. A permanent (decline) in the expected real interest rate now has what effect on your desired capital stock?
Raises it, because the user cost of capital is now lower
Suppose your company is in equilibrium, with its capital stocka t its desired level. A permanent (increase) in the expected real interest rate now has what effect on your desired capital stock?
Lowers it, because the user cost of capital is now higher
Calculate the tax-adjusted user cost of capital of a machine that costs $10,000 and depreciates at a rate of 10%, when the real interest rate is 3% and the tax rate on revenue is 5%
$1368
Cummins, Hubbard, and Hassett studied the effects of taxes on investment by
examining what happend to investment when major tax reforms took place
Cummins, Hubbard, and Hassett found that investment responded to a tax change that affected the user cost of capital, with an elasticity of
-0.66
What is the different between gross investment and net investment?
Net investment = gross investment minus depreciation
In 2003, your firm's capital stock equaled $100 million, and in 2004 it equaled $105 million. THe average depreciation rate on your capital stock is 20%. Gross investment in 2004 equaled
$25 million
In 2003, your firm's capital stock equaled $10 million, and in 2004 it equaled $15 million. The average depreciation rate on your capital stock is 20%. Net investment in 2004 equaled
$5 million
Your firm has a capital stock of $10 million and a depreciation rat of 15%. Gross investment is $3 million. How much is net investment?
$1.5 million
You have just purchased a home that cost $250,000. The nominal mortgage interest rate is 8% per annum, mortgage interest payments are tax deductible, and you are in a 30% tax bracket. The expected inflation rate is 4%. Maintenance and other expenses are 8
$24,000
When desired national saving equals desired national investment, what market is in equilibrium?
The goods market
An economy has full-employment output of 5000. Government purchases are 1000. Desired consumption and desired investment are given by
C(d) = 3000 - 2000r + .10Y
I(d) = 1000 - 4000r
where Y is output and r is the real interest rate. The real interest rate
8.33%
An economy has of government purchases are 1000. Desired national saving and desired investment are given by
S(d) = 200 + 5000r + .10Y - .20G
I(d) = 1000 - 4000r
When the full-employment level of output equals 5000, then the real interest rate that clears
16.67%
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
the right and decrease the real interest rate
An increase in the expected real interest rate tends to
raise desired savings, but lower desired investment
The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve
causes the total amounts of saving and investment to fall
A temporary decrease in government purchases would cause
a rightward shift in the saving curve, but no shift in the investment curve
If consumers foresee future taxes completely, as reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause
a shift in neither the saving nor the investment curve
An invention that raises the future maringal product of capital would cause an increase in desired investment, which would cause the investment cuve to shift o the ___ and would cause the real interest rate to ___
right; increase
A temporary supply shock, such as a drought, would
have little or no effect on desired investment
David consumes 200 in the current period and 300 in the future period. The real interest rate is 10% per peiod. David's present value of lifetime consumption is
500
Rachel earns nothing during her learning period, 1100 during her working period, and nothing during her retirement period. She has initial assets of 300. The real interest rate is zero. Rachel is not allowed to borrow by the banks. Whenever possible, Rach
550
A curve that connects all the consumption combinations that yield the same level of utility is known as
an indifference curve
If Claudete gets a permanent increase in her income of $1000 per year, she saves and extra $200 this year and consumes and extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved ___ of the extra incom
More than $200
Suppose the government provides a tax cut today that is matched by a tax increase in the future that's equal in present value to the tax cut. This causes a consumer's saving to
increase
The substitution effect of a decrease in real interest rates is to cause a consumer to
decrease future consumption and increases current consumption
For a borrower, an increase in the real interest rate will lead to
lower current consumption and less borrowing