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Questions and Answers
What is accounting profit?
How is total income in the economy distributed according to the neoclassical theory of distribution?
What determines the distribution of national income between labor and capital?
What is the relationship between economic profit and accounting profit?
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What is the assumption about the returns to scale in the neoclassical theory of distribution?
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What is the role of the owners of the firm in the neoclassical theory of distribution?
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In the classical model, what adjusts to eliminate any unemployment of labor in the economy?
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The neoclassical theory of distribution explains the allocation of:
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Economic profit is zero if:
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According to Euler's theorem, if competitive firms pay each factor its marginal product and the production function has constant returns to scale, the sum of all factor payments will equal:
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What is the effect of a decrease in the real rental price of capital on the economy?
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What is the result of paying all factors their marginal products in a competitive economy?
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What is the formula for the consumption function given in the text?
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What happens to consumption when the tax rate t1 increases from 0.2 to 0.25?
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What is the effect of an increase in labor (L) from 100 to 144 on consumption?
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Who purchases investment goods as measured in the GDP?
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What percentage of GDP is total investment in the United States?
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What is the effect of an increase in the interest rate on the quantity of investment goods demanded?
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In the classical model with fixed income, a decrease in the real interest rate could be the result of a(n):
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In the classical model with fixed income, a reduction in the government budget deficit will lead to a:
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When government spending increases and taxes are increased by an equal amount, interest rates:
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In the neoclassical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving ______ and private saving ______.
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In the classical model with fixed income, what is the effect of an increase in government spending on the real interest rate?
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What is the effect of a decrease in desired investment on the real interest rate in the classical model with fixed income?
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What is the effect on public saving and private saving when there is a decrease in government spending with no change in taxes in the neoclassical model with fixed income?
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What is the result of an increase in government spending on the interest rate and investment?
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What is the term for the reduction in investment caused by an increase in the interest rate resulting from increased government spending?
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What was the typical relationship between government spending and interest rates during wartime in the United Kingdom between 1730 and 1920?
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What can be the result of a decrease in government spending in the classical model with fixed income?
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What is the effect of an increase in government spending on the economy in the classical model with fixed income?
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Study Notes
Accounting Profit and Economic Profit
- Economic profit equals accounting profit minus the return to capital.
- Economic profit plus the return to capital equals accounting profit.
Neoclassical Theory of Distribution
- In competitive firms with constant returns to scale, total income is distributed partly between labor and capital used in production, with the surplus going to the owners of the firm as profits.
- Total output is divided between payments to capital and payments to labor depending on their marginal productivities.
Distribution of National Income
- The distribution of national income between labor and capital in a competitive, profit-maximizing economy with constant returns to scale is determined by the marginal productivities of labor and capital.
Classical Model
- In the classical model, the real wage adjusts to eliminate any unemployment of labor in the economy.
- The neoclassical theory of distribution explains the allocation of income among factors of production.
Economic Profit
- Economic profit is zero if all factors are paid their marginal products and there are constant returns to scale, or if all firms maximize profits and all factors are paid their marginal products.
Euler's Theorem
- According to Euler's theorem, if competitive firms pay each factor its marginal product and the production function has constant returns to scale, the sum of all factor payments will equal total output.
Consumption Function
- The consumption function is given by C = 200 + 0.7(Y – T), where C is consumption, Y is income, and T is taxes.
- If the tax rate increases, consumption decreases.
Investment
- Investment goods are purchased by business firms alone, and total investment in the United States averages about 15-20% of GDP.
- An increase in the interest rate leads to a decrease in the quantity of investment goods demanded.
Classical Model with Fixed Income
- In the classical model with fixed income, a decrease in the real interest rate could be the result of an increase in desired investment or a decrease in taxes.
- A reduction in government spending with no change in taxes leads to an increase in public saving and an increase in private saving.
Crowding Out
- Crowding out occurs when an increase in government spending increases the interest rate and decreases investment.
- The reduction in investment brought about by the increase in the interest rate caused by increased government spending is called crowding out.
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Description
Test your understanding of the classical model and neoclassical theory of distribution in economics. This quiz covers key concepts such as the adjustment of prices to eliminate unemployment, the allocation of output, and the distribution of income. Take this quiz to see how well you know these fundamental economic principles.
