ECON302 Lecture Notes - Lecture 8: Consumption Smoothing, Bavarian People'S Party, Net Domestic Product

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sangriagiraffe866

18 May 2016

School

University of Waterloo

Department

Economics

Course

ECON302

Professor

Nafeez Fatima

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Document Summary

Chapter seven: consumption, saving, and real business cycle. Real business cycle theory is the study of economic fluctuations that result from shifts to the technology level, a. This theory is used to study fluctuations in real gdp and other macroeconomic variables, including consumption, saving, investment, the real wage rate, the real rental price of capital, and the interest rate. Starting with the household budget constraint equation, a few assumptions are made: C + (1/p) b + k = /p + (w/p)l + i(b/p + k: /p = 0 when the markets for labour and capital services are cleared, given perfect competition, households take w/p and i as given. Supposing a household has given labour, l, and real assets, (b/p + k), the total of household real income is given on the right-hand side of the equation. The household can then choose how to divide this real income between consumption, c, and real saving, (1/p) b + k.

Related Questions

1. The multiplier helps explain

A. why a decrease in taxes causes real Gross Domestic Product (GDP) to fall by more than the amount of the decrease in taxes.

B. why a fall in investment cause real Gross Domestic Product (GDP) to rise by more than the amount of the decrease in investment.

C. why a rise in government expenditures causes real Gross Domestic Product (GDP) to rise by more than the amount of the increase in government spending.

D. why an increase in disposable income causes real Gross Domestic Product (GDP) to rise by less than the amount of the increase in disposable income.

2. If the marginal propensity to save (MPS) increases, the multiplier

A. decreases.

B. can either increase or decrease, depending on what happens to the marginal propensity to consume (MPC).

C. stays the same.

D. increases.

QUESTION 60

The investment function will shift when there is a change in

		A. the opportunity cost of retained earnings.
		B. firms' profit expectations.
		C. the cost of borrowing.
		D. the interest rate.

1.43 points

QUESTION 61

In the Keynesian model, whenever planned saving exceeds planned investment,

		A. there will be unplanned inventory accumulation.
		B. real GDP will not be influenced.
		C. the interest rate will remain unchanged.
		D. there will be unplanned inventory depletion.

1.43 points

QUESTION 62

In the Keynesian model, whenever planned saving is less than planned investment,

		A. there will be unplanned inventory depletion.
		B. the interest rate will remain unchanged.
		C. there will be unplanned inventory accumulation.
		D. real GDP will not be influenced.

1.43 points

QUESTION 63

Government purchases

		A. are determined by the political process.
		B. are determined by the public.
		C. are influenced by interest rates.
		D. are determined by suppliers.

1.43 points

QUESTION 64

If, at some level of output, total planned real expenditures are less than real Gross Domestic Product (GDP),

		A. real GDP will either fall or remain unchanged, depending on the MPC.
		B. real GDP will rise.
		C. real GDP remains unchanged.
		D. unplanned inventories will increase and real GDP will fall.

1.43 points

QUESTION 65

When the economy is operating at the equilibrium level of GDP, we know that

		A. total planned real expenditures equal real GDP.
		B. real net exports equal inventory changes.
		C. planned real investment spending equals real net exports of zero.
		D. total planned real consumption expenditures equal real GDP.

1.43 points

QUESTION 66

One divided by the marginal propensity to save (MPS) is the formula for

		A. the inverse of the multiplier.
		B. the multiplier.
		C. one minus the multiplier.
		D. autonomous consumption.

QUESTION 67

Thinking like an economist would, which is true of investment?

		A. Investment represents spending on capital goods.
		B. Investment is a stock concept.
		C. Investment is putting money into stocks and bonds.
		D. It is the portion of disposable income that is not used for consumption or saving.

QUESTION 68

Other things being equal, if input prices rise in a country, then there would be

		A. cost-push inflation.
		B. demand-pull inflation.
		C. cost-pull deflation.
		D. more production and a lower price level.

QUESTION 69

In the short run, if the price level rises, then the overall economy can temporarily produce beyond its nominal capacity. One reason for this is that

		A. existing capital equipment can be used more intensively.
		B. wage rates rise almost simultaneously with the price level.
		C. the unemployment rate usually rises dramatically along with the price level.
		D. workers can be switched from counted to uncounted production.

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1- Milton Friedman viewed current income as the sum of permanent income and:

A) bonus income. B) transitory income. C) temporary income. D) surprise income.

2- Permanent and transitory income differ in the way that permanent income is ______ than is transitory income.

A) larger B) more persistent C) taxed at a higher rate D) more variable

3- If consumers have rational expectations and follow the permanent-income hypothesis, their current consumption will increase when:

A) previously announced tax reductions are implemented.

B) they receive an anticipated raise.

C) they receive an unexpected inheritance.

D) they make the last payment on their automobile loan

4- Consumers with time-inconsistent preferences:

A) base consumption decisions on transitory rather than permanent income.

B) seek to consume more in retirement than during their working years.

C) may alter decisions simply because time passes.

D) face borrowing constraints that prevent rational behavior.

5- The most volatile component of real GDP is:

A) consumption spending. B) government spending. C) investment spending. D) net exports.

6-If the capital stock is fixed and something happens to raise the marginal product of capital (MPK) for any given quantity of capital, then the real rental price of capital will:

A) remain the same. B) rise. C) fall. D) fall and then rise.

7- The investment spending component of GDP includes all of the following except:

A) business fixed investment. B) net foreign investment. C) residential investment. D) inventory investment.

8- The real cost of capital is the:

A) purchase price of a unit of capital divided by the price level.

B) purchase price of a unit of capital minus the rate of inflation.

C) cost of a unit of capital less the marginal product of capital.

D) cost of buying and renting out a unit of capital measured in units of the economy's output.

9- The profit rate of a firm that rents capital is equal to:

A) the marginal product of capital minus the cost of capital.

B) the cost of capital minus the marginal product of capital.

C) zero.

D) a negative number, if it is adding to its capital stock.

10- Other things being equal, the neoclassical model of investment predicts that net investment will increase when the:

A) marginal product of capital falls.

B) price of new capital goods rises.

C) real interest rate falls.

D) depreciation rate rises.

11- If Tobin's q is greater than 1, then managers should:

A) increase the capital stock of the firm.

B) maintain the existing capital stock of the firm.

C) allow inventories to run down.

D) decrease the capital stock of the firm.

12- According to Keynes, movements in stock prices:

A) follow a random walk.

B) reflect rational valuations of underlying economic fundamentals.

C) result when new information becomes available.

D) are often driven by irrational waves of optimism and pessimism.

Question 1

The law of demand states that there is a direct relationship between supply and demand.

True

False

4 points

Question 2

Equilibrium is a state of balance between supply and demand.

True

False

4 points

Question 3

Goods are scarce for both rich and poor.

True

False

4 points

Question 4

"The big corporations in this country, like ExxonMobil and GM, have deep pockets and need to be hiring more people." This is a positive statement about economic policy.

True

False

4 points

Question 5

The law of supply states that there is a direct relationship between price and quantity demanded.

True

False

4 points

Question 6

In the circular flow model, firms own economic resources, and householdsbuy the manufactured products and services.

True

False

4 points

Question 7

Households play a dual role of providing the factors of production whilepurchasing the goods and services of firms.

True

False

4 points

Question 8

Opportunity cost is the lowest valued benefit that must be sacrificed asthe result of choosing an alternative.

True

False

4 points

Question 9

Scarcity denotes that our desire for a good exceeds the amount that isfreely available from nature.

True

False

4 points

Question 10

Economics is a social science concerned with satisfying man's unlimitedwants with limited resources.

True

False

4 points

Question 11

Joint output of individuals or nations will be maximized when goods areexchanged between parties in accordance with the law of"comparative advantage".

True

False

4 points

Question 12

The production possibilities frontier assumes that the level of technologyvaries when applying the model.

True

False

4 points

Question 13

Excess demand in the market will cause the price of a product to decline.

True

False

4 points

Question 14

Demand is measured on the vertical axis and supply on the horizontalaxis.

True

False

4 points

Question 15

A change in quantity demanded is a movement along the same demandcurve.

True

False

4 points

Question 16

As globalization and world trade proliferates, individual markets withincountries' economies become more competitive.

True

False

4 points

Question 17

Which growth theory compares a subsistence real wage rate to the actual real wage rate?

		Classical growth theory
		Inflation growth theory
		Neoclassical growth theory
		New growth theory

4 points

Question 18

Suppose the working age population in Tiny Town is 100 people. If 25 of these people are NOT in the labor force, the ________ equals ________.

		unemployment rate; 25/100 Ã 100
		employment rate; 25/75 Ã 100
		labor force; 75
		labor force; 25/100 Ã 100

4 points

Question 19

Suppose there is a rise in the real wage rate. As a result, the quantity of labor demanded:

		increases.
		decreases.
		does not change because there is no change in the money wage rate.
		increases only if the price level also decreases.

4 points

Question 20

GDP can be computed as the sum of:

		all sales that have taken place in an economy over a period of time.
		the total expenditures of consumers and business over a period of time.
		the total expenditures of consumption, investment, and government expenditure on goods and services over a period of time.
		the total expenditures of consumption, investment, government expenditure on goods and services, and net exports over a period of time.

4 points

Question 21

The real wage rate equals:

		(100 x (money wage rate/price level)
		(100 x (price level/money wage rate)
		(money wage rate x (price level)
		(money wage + (number of hours worked/(price level)

4 points

Question 22

If the CPI was 121.5 at the end of 2007 and 138.3 at the end of 2008, the inflation rate over these two years was:

		10.2 percent.
		13.8 percent.
		12.2 percent.
		16.8 percent.

4 points

Question 23

A movement along the production function is the result of a change in:

		the quantity of labor.
		technology.
		capital.
		interest rates.

4 points

Question 24

All of the following are part of fiscal policy EXCEPT:

		setting tax rates.
		setting government spending.
		choosing the size of the government deficit.
		controlling the money supply.

4 points

Question 25

Along a production possibilities frontier for real GDP and the quantity of leisure time, as leisure time increases, real GDP:

		decreases.
		increases.
		stays the same.
		could increase, decrease or stay the same.

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ECON302 Lecture Notes - Lecture 8: Consumption Smoothing, Bavarian People'S Party, Net Domestic Product

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