Question 1

Suppose an economy’s Cobb-Douglas production function is $$Y = K$$^{0.25}$$L^{0.75}$$, where $$K is $$capital and $$L$ is labor. What fraction of total income is paid to capital?

Accepted Answer

$$0.25$$

Question 2

Given the Cobb-Douglas production function $$Y = K$$^{0.3}$$L^{0.7}$$, if immigration increases the labor force by 10%, what happens to the real rental price of capital ($$r$)?

Accepted Answer

It decreases by approximately 7%

Question 3

Suppose a plague kills half the population in a medieval economy with $$Y = K$$^{0.5}$$L^{0.5}$$, $$K = 100$$, and $$L = 100. $$What happens to the marginal product of labor ($$MPL$)?

Accepted Answer

It doubles

Question 4

In the neoclassical theory of distribution, what does the real wage equal?

Accepted Answer

The marginal product of labor ($$MPL)$$

Question 5

Suppose technological progress increases the value of marginal product of capital by 10%. What happens to the real wage?

Accepted Answer

It increases

Question 6

If the government runs a budget deficit, what is the most likely effect on interest rates in the loanable funds market?

Accepted Answer

Interest rates increase

Question 7

Consider the consumption function $$C = 1,200 + 0.9(Y - T). $$What does the number $$0.9$$ represent?

Accepted Answer

The marginal propensity to consume

Question 8

Suppose the price of capital rises by 10 percent. What happens to the real rental price of capital and the real wage?

Accepted Answer

The real rental price of capital increases, and the real wage decreases

Question 9

In the production function $$Y = K$$^{0.4}$$L^{0.6}$$, what is the marginal product of labor ($$MPL$)?

Accepted Answer

$$MPL = 0.6 \frac{Y}{L}$$

Question 10

If farmers’ productivity increases due to technological progress, according to the neoclassical theory, what should happen to the real wage of farmers?

Accepted Answer

It should increase

Question 11

Suppose workers can freely move between farming and barbering. If the price of food rises, what happens to the nominal wage of farmers and barbers?

Accepted Answer

Both nominal wages increase

Question 12

In the national income accounts, what is the economic interpretation of the production function?

Accepted Answer

It shows how inputs are transformed into output

Question 13

If the marginal product of human capital increases, what happens to the income share paid to human capital?

Accepted Answer

It increases

Question 14

Suppose the government increases scholarships so that more people attend college. According to the neoclassical theory, what is a likely effect on wage inequality?

Accepted Answer

Wage inequality decreases

Question 15

Given the consumption function $$C = 1,200 + 0.9(Y - T) - 500r$$, what does the term $$-500r$$ represent?

Accepted Answer

The negative effect of the interest rate on consumption

Question 16

Which of the following is an example of a government purchase, not a transfer payment?

Accepted Answer

Building a highway

Question 17

If the government budget deficit increases, what is the likely effect on investment in the economy?

Accepted Answer

Investment decreases

Question 18

According to the empirical evidence in the neoclassical theory, if labor productivity growth slows, what happens to the growth rate of real wages?

Accepted Answer

It slows down

Question 19

In the Cobb-Douglas production function $$Y = K$$^{0.3}$$L^{0.7}$$, what is the marginal product of capital ($$MPK$)?

Accepted Answer

$$MPK = 0.3 \frac{Y}{K}$$

Question 20

If the government increases transfer payments, what is the most direct effect on aggregate demand?

Accepted Answer

Aggregate demand increases

Macroeconomics Study Guide: Production, Distribution, Consumption, and Government Policy

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