Exhibit: Saving, Investment, and the Interest Rate    The economy begins in equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of the real interest rate, saving, and investment if there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy)?

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wages of:

Assume that equilibrium GDP (Y) is 5,000, consumption (C) is C = 500 + 0.6 (Y − T), taxes (T) are 1,000, and government spending is 600. Equilibrium investment is:

Assume that the consumption function is given by C = 150 + 0.85 (Y − T), the tax function is given by T = t0 + t1Y, and Y is 5,000. If t1 decreases from 0.3 to 0.2, then consumption increases by:

Assume that the investment function is given by I = 1,000 − 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and that the inflation rate is 2 percent. According to the investment function, investment will be:

Skill-biased technological change _____ the demand for skilled workers, while a slowdown in the pace of educational advancement reduces the supply of skilled workers. Given these trends, we should expect _____ wages for skilled workers.

An economy’s factors of production and its production function determine the economy’s:

One cost of unexpected inflation, but not expected inflation, is:

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by _____ percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by _____ percent.

In the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then _____ determines real gross domestic product (GDP), and _____ determines nominal GDP.