CH 3-6 Economy in the Long Run Model

Question 1

Factors of Production

Answer 1

K- Capital & L- Quantity of Labor

Question 2

Returns to Scale can be

Answer 2

Constant, Increasing or Decreasing

Question 3

Constant Returns to Scale

Answer 3

Double Input means Double Output

Question 4

Increasing Returns to Sclae

Answer 4

Double input means more that Double Output

Question 5

Decreasing Returns to Scale

Answer 5

Double input means less than double output

Question 6

Production Function

Answer 6

Y= F (K,L) “output is a function of capital and labor”

Question 7

If capital and labor are fixed..

Answer 7

Output is fixed as well

Question 8

Marginal Product of Labor (MPL)

Answer 8

Nominal Wage”W/P”Price of Output
-OR-
Real Wage

Question 9

Marginal Product of Capital (MPK)

Answer 9

Nominal Rental Rate “R/P” Price of Output
-OR-
Real Rental Rate

Question 10

Cobb-Douglas Production Function

Answer 10

Y= A x K* x L ^(1-*)

• is “Alpha” the capitols share of total income

Question 11

National Savings

Answer 11

S=Y-C-G (Outpur-Consumption-Government Spending)

Question 12

Public Savings

Answer 12

S= T-G Taxes- Government Spending

Question 13

Private Savings

Answer 13

S=Y-T-C (income-taxes-consumption)

Question 14

Budget Surplus

Answer 14

Tax Revenue > Government Spending

Question 15

Budget Deficit

Answer 15

Tax Revenue < Government Spending

Question 16

Loanable Funds Market

Answer 16

Model with the real interest rate “r” on y axis and Investment, Savings “I,S” on the x axis

Question 17

Increasing government spending will _________ investment

Answer 17

Decrease, gov spending “crowds out” investment

Question 18

Three types of Economies

Answer 18

Closed, Small Open, and Large Open

Question 19

Trade Balance= Net Capital Outflow

Answer 19

S-I = NX

Question 20

Real Exchange Rate

Answer 20

Nominal Exchange Rate x Price of Domestic Good/

Price of Foreign Good

Question 21

Real Exchange Rate “E” =

Answer 21

e x (P/P*) nominal exchange rate x Price Level Ratio