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Question 1

What is the production function in macroeconomics?

Answer 1

Y = AF(K,N), where Y = output, K = capital, N = labor, A = productivity.

Question 2

Define marginal product of capital (MPK).

Answer 2

Extra output from one more unit of capital, holding other inputs constant.

Question 3

Define marginal product of labor (MPN).

Answer 3

Extra output from one more unit of labor, holding other inputs constant.

Question 4

What does diminishing marginal product mean?

Answer 4

As more of an input is added, its additional contribution to output falls.

Question 5

What is a supply (productivity) shock? Give an example.

Answer 5

A change in productivity (A) that shifts the production function, e.g., new technology, bad weather.

Question 6

Define returns to scale and list its three types.

Answer 6

Output change when all inputs scale by z: constant (Y2 = zY1), increasing (Y2 > zY1), decreasing (Y2 < zY1).

Question 7

How do firms decide how much labor to hire in the short run?

Answer 7

By setting MPN = w (real wage).

Question 8

What condition defines the labor demand curve?

Answer 8

MPN = w.

Question 9

Why is the labor demand curve downward sloping?

Answer 9

As real wage falls, firms hire more labor (MPN > w).

Question 10

What shifts the labor demand curve?

Answer 10

Productivity shocks (A↑) and capital stock increases (K↑).

Question 11

What is the income-leisure tradeoff?

Answer 11

Workers choose between working (income) and leisure, balancing utility.

Question 12

Define substitution effect of a wage increase.

Answer 12

Higher wage makes leisure more costly → less leisure → more labor supplied.

Question 13

Define income effect of a wage increase.

Answer 13

Higher wage raises wealth → more leisure demanded → less labor supplied.

Question 14

What typically dominates in labor supply: substitution or income effect?

Answer 14

Substitution effect, so labor supply slopes upward.

Question 15

What factors shift labor supply?

Answer 15

Wealth, expected future wages, population size, participation rate.

Question 16

What is full-employment output (Y*)?

Answer 16

Output when labor market clears (Nd = Ns) and wages/prices adjust.

Question 17

What happens to equilibrium wage, employment, and output after a negative supply shock?

Answer 17

↓ A → ↓ MPN → ↓ Nd → lower wage, lower employment, lower Y*.

Question 18

Define the three employment status categories measured by the BLS.

Answer 18

Employed, Unemployed, Not in labor force.

Question 19

Define unemployment rate, labor force participation rate, and employment ratio.

Answer 19

u-rate = unemployed / labor force. Participation = labor force / adult population. Employment ratio = employed / adult population.

Question 20

What is the natural rate of unemployment?

Answer 20

Frictional + structural unemployment at full employment.

Question 21

What is Okun’s Law? State the relationship.

Answer 21

ΔY/Y = 3% – 2Δu; each 1% ↑ in unemployment reduces GDP growth by 2%.

Question 22

Write the goods market equilibrium condition.

Answer 22

Sd = Id.

Question 23

What is a lump-sum tax? How does it differ from an income tax?

Answer 23

Fixed amount regardless of behavior (non-distortionary); income tax depends on earnings.

Question 24

State the government budget constraint in present value terms.

Answer 24

G1 + G2/(1+r) = T1 + T2/(1+r).

Question 25

What is Ricardian Equivalence?

Answer 25

A tax cut today, offset by future tax increases, has no effect on consumption or saving.

Question 26

Under Ricardian Equivalence, what is the effect of a tax cut today on current consumption?

Answer 26

No effect; consumers save it anticipating future taxes.

Question 27

List two reasons why Ricardian Equivalence may fail.

Answer 27

Borrowing constraints, myopia, lack of bequests, non-lump-sum taxes.

Question 28

What did Shapiro & Slemrod (1995) find about Bush’s 1992 withholding experiment?

Answer 28

43% spent extra income (violating RE), 57% saved or offset it (consistent with RE).

Question 29

How does an increase in government spending affect desired saving?

Answer 29

↓ Saving (Sd = Y – Cd – G).

Question 30

How does an increase in taxes affect saving under Ricardian Equivalence?

Answer 30

No effect, since consumers anticipate future offsetting tax changes.

Question 31

Define investment in macroeconomics.

Answer 31

Purchases of new capital goods, housing, and inventory accumulation.

Question 32

What are the three components of total investment?

Answer 32

Business fixed investment, residential fixed investment, inventory investment.

Question 33

What is business fixed investment?

Answer 33

Firms’ spending on structures, equipment, and intellectual property.

Question 34

Why is investment important for the business cycle and growth?

Answer 34

Highly volatile, drives business cycle fluctuations, and builds productive capacity.

Question 35

Define desired capital stock (K*).

Answer 35

Level of capital where MPKf = user cost of capital (uc).

Question 36

What is the equation of motion for capital?

Answer 36

Kt+1 = (1-d)Kt + It.

Question 37

Define user cost of capital.

Answer 37

Real cost of using capital: uc = (r + d)pk.

Question 38

What factors shift the desired capital stock?

Answer 38

Real interest rate, depreciation rate, price of capital, technology. | MPKf = ( r + d ) pk --> r, d, pk, tech shifts mpk

Question 39

How do taxes affect desired capital stock?

Answer 39

Higher τ raises tax-adjusted user cost → reduces K*.

Question 40

Define the effective tax rate.

Answer 40

Hypothetical tax rate on revenues with same effect on K* as actual taxes. | The tax-adjusted user cost increases which reduces desired capital stock

Question 41

Write the goods market equilibrium condition in terms of saving and investment.

Answer 41

Sd = Id.

Question 42

What is the loanable funds market interpretation of goods market equilibrium?

Answer 42

Saving = supply of loanable funds, Investment = demand; r adjusts to clear market.

Question 43

Explain the crowding out effect.

Answer 43

Higher G → ↓ Sd → ↑ r → ↓ I.

Question 44

In the Reagan deficits case, how did higher G and lower T affect saving and investment?

Answer 44

Both reduced national saving → ↑ r → ↓ investment.

Question 45

What are the components of GDP in the identity Y = C + I + G?

Answer 45

Consumption (C), Investment (I), Government spending (G).

Question 46

Define consumption in macroeconomics.

Answer 46

Goods and services purchased by consumers.

Question 47

Define saving in macroeconomics.

Answer 47

Current income not consumed.

Question 48

Define investment in macroeconomics.

Answer 48

Purchases of new capital goods by firms and houses by people.

Question 49

Define government spending in macroeconomics.

Answer 49

Goods and services purchased by federal, state, and local governments (exogenous).

Question 50

What is national saving?

Answer 50

Private saving + Public saving.

Question 51

Write the formulas for private saving and public saving.

Answer 51

Private saving: Sprivate = Y – T – C. Public saving: Spublic = T – G.

Question 52

Write the formula for national saving in terms of Y, C, and G.

Answer 52

Snational = Y – C – G.

Question 53

What is the goods market equilibrium condition?

Answer 53

Sd = Id.

Question 54

What is intertemporal choice?

Answer 54

Decisions involving tradeoffs between present and future consumption.

Question 55

What is consumption-smoothing?

Answer 55

Preference to keep consumption relatively even across time.

Question 56

Who developed the intertemporal choice model?

Answer 56

Irving Fisher.

Question 57

What is the life-cycle model and who proposed it?

Answer 57

Model of income, consumption, and saving patterns over life, by Modigliani and Friedman (permanent income hypothesis).

Question 58

According to the life-cycle model, when is saving typically highest?

Answer 58

Middle age (50–60).

Question 59

What is dissaving, and when does it occur in the life-cycle model?

Answer 59

Spending more than income (negative saving), usually during retirement.

Question 60

In a two-period model, what are the key variables (y1, y2, c1, c2, s1, r)?

Answer 60

y = income, c = consumption, s = saving, r = real interest rate.

Question 61

Write the intertemporal budget constraint in present value form.

Answer 61

c1 + c2/(1+r) = y1 + y2/(1+r).

Question 62

Define present value (PV).

Answer 62

Value today of a future amount: PV = X/(1+r)^T.

Question 63

Define future value (FV).

Answer 63

Value in future of today’s payment: FV = X(1+r)^T.

Question 64

What is the slope of the intertemporal budget line?

Answer 64

–(1+r).

Question 65

What is the utility function in the two-period model?

Answer 65

U(c1, c2) = u(c1) + βu(c2).

Question 66

Define the discount factor (β).

Answer 66

Weight placed on future utility, 0 < β < 1.

Question 67

What does a higher β imply about patience?

Answer 67

More patient; future utility valued more.

Question 68

What is the Euler equation for intertemporal utility maximization?

Answer 68

u’(c1) = β(1+r)u’(c2).

Question 69

Interpret the condition when r = ρ (rate of time preference).

Answer 69

Consumption equal across periods (c1 = c2).

Question 70

If r > ρ, how does consumption compare across periods?

Answer 70

Future consumption > current consumption.

Question 71

If r < ρ, how does consumption compare across periods?

Answer 71

Current consumption > future consumption.

Question 72

How does an increase in current income (y1) affect consumption and saving?

Answer 72

Both c1 and c2 rise; saving also increases.

Question 73

How does an increase in future income (y2) affect consumption and saving?

Answer 73

Both c1 and c2 rise; saving falls.

Question 74

How does an increase in the real interest rate (r) affect consumption and saving?

Answer 74

↓ c1, ↑ c2; saving rises.

Question 75

What is the substitution effect of a rise in r on current consumption?

Answer 75

Higher opportunity cost of current consumption → ↓ c1, ↑ c2.

Question 76

What is the income effect of a rise in r for a saver?

Answer 76

Saver feels richer → ↑ c1 and ↑ c2.

Question 77

In aggregate, how does current consumption respond to an increase in r?

Answer 77

Falls (so saving rises).

Question 78

What are the main determinants of desired national saving?

Answer 78

Current output, expected future output, wealth, and real interest rate.