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.
