Question 1

Use the intertemporal budget constraint -- equation (2) -- to explain how an increase in the real interest rate causes two distinct effects, an income effect and a substitution effect, and how those effects differ depending on whether the consumer is a saver or a borrower.

Accepted Answer

An increase in the real interest rate af...

Question 2

Intertemporal Budget Constraint
 
-Given the table above, suppose consumption in period two is $35,000. Then, the interest rate rises to five percent, and period-two consumption falls to $34,900. We may infer that ________.

Accepted Answer

A)   the income effect is stronger than the substitution effect
B)   the substitution effect is stronger than the income effect
C)   the substitution and income effects cancel out
D)   this consumer has a binding borrowing constraintE) B) and D)
F) A) and B)

Question 3

Discounting involves dividing next-period income by________.

Accepted Answer

A)   one plus the real rate of interest
B)   the nominal rate of interest.
C)   current income.
D)   the real rate of interest.E) C) and D)
F) B) and C)

Question 4

________ might cause the borrowing constraint to become non-binding, even though the consumer still cannot borrow.

Accepted Answer

A)   an increase in future (expected)  income
B)   an increase in the real interest rate
C)   a decrease in current income
D)   a decrease in the real interest rateE) A) and D)
F) All of the above

Question 5

Advances in medical practice have increased both expected lifespans and medical expenditures. What does the life-cycle hypothesis predict as the macroeconomic consequences?

Accepted Answer

An extended lifespan implies more years ...

Question 6

In 2008, the wealth of U.S. households fell by ________.

Accepted Answer

A)   $11 million.
B)   $11 billion.
C)   $11 trillion.
D)   $11 gajillion.E) A) and D)
F) C) and D)

Question 7

Indifference curves tend to be convex because ________.

Accepted Answer

A)   they are bowed inwards toward the origin.
B)   consumers dislike large fluctuations in consumption from one period to the next.
C)   of the gap between real and nominal interest rates.
D)   the marginal rate of substitution exceeds the price effect.E) C) and D)
F) B) and C)

Question 8

Consumers who do not consistently discount the future over time behave in a fashion that is most consistent with ________.

Accepted Answer

A)   the theory of intertemporal choice
B)   the Keynesian theory of consumption
C)   the permanent income hypothesis
D)   the life-cycle hypothesisE) All of the above
F) None of the above B

Question 9

According to the permanent income hypothesis, the impact of ________.

Accepted Answer

A)   a change in permanent income on consumption is greater than the impact resulting from a change in transitory income.
B)   a change in transitory income on consumption is greater than the impact resulting from a change in permanent income.
C)   a change in transitory income is felt primarily through changes in the total tax revenue paid to the federal government.
D)   a change in permanent income on consumption is larger than the impact resulting from a change in future income.E) B) and C)
F) A) and D)

Question 10

In practice, it is usual to assume that, in explaining the impact of a change in interest rates ________.

Accepted Answer

A)   the substitution effects outweigh the income effects.
B)   the income effect outweighs the substitution effect.
C)   the income and substitution effects cancel out with one another.
D)   the income effect increases the severity of the substitution effect.E) B) and D)
F) A) and C)

Question 11

If high incomes inspire more saving than low incomes ________.

Accepted Answer

A)   the average propensity to consume falls as income rises
B)   the marginal propensity to consume rises as income rises
C)   autonomous consumption falls as income rises
D)   the average propensity to consume rises as wealth risesE) None of the above
F) All of the above

Question 12

According to rational expectations, expectations will only change in the event that ________.

Accepted Answer

A)   wealth changes.
B)   current income changes.
C)   permanent income changes.
D)   unanticipated new information arises.E) C) and D)
F) All of the above

Question 13

Intertemporal Budget Constraint
 
-Using the table above, and assuming no bequest, what amount of consumption is chosen in period 1, if the consumer wants consumption in the two periods to be equal? If initial wealth is $40,000, what amount of consumption is equal over the two periods?

Accepted Answer

Use equati...

Question 14

The rate at which a consumer is willing to give up consumption in one period for additional consumption in another is known as ________.

Accepted Answer

A)   the marginal propensity to save.
B)   the marginal propensity to consume.
C)   the marginal rate of substitution.
D)   the average propensity to consume.E) A) and C)
F) A) and D)

Question 15

How might consumers for whom the borrowing constraint is binding benefit from access to relatively expensive forms of credit (e.g., pawn shops and "payday" loans)?

Accepted Answer

A binding borrowing constraint means tha...

Question 16

The life-cycle hypothesis applies the concept of ________ to retirement.

Accepted Answer

A)   income & substitution effects
B)   transitory income
C)   autonomous consumption
D)   consumption smoothingE) A) and B)
F) B) and D) D

Question 17

In the permanent income hypothesis, income is divided into ________.

Accepted Answer

A)   current and future income.
B)   future and transitory income.
C)   transitory and permanent income.
D)   permanent and current income.E) A) and D)
F) B) and C)

Question 18

The recession of 2008-2009 demonstrated that ________.

Accepted Answer

A)   consumption is especially sensitive to changes in the retirement age
B)   changes in wealth can be a major source of fluctuations in consumption
C)   as consumers get older, they tend to exhaust all their savings
D)   permanent income is something of a misnomerE) All of the above
F) C) and D) B

Question 19

When the borrowing constraint is binding, ________.

Accepted Answer

A)   wealth is zero
B)   C1 = Y1
C)   C2 = Y2
D)   current and future consumption are equalE) A) and C)
F) None of the above

Question 20

Indifference curves describe ________.

Accepted Answer

A)   the relationship between current and future income.
B)   the utility received by an individual consumer.
C)   the relationship between utility and income.
D)   productivity levels.E) None of the above
F) All of the above

Exam 18: Consumption and Saving

Use the intertemporal budget constraint -- equation (2) -- to explain how an increase in the real interest rate causes two distinct effects, an income effect and a substitution effect, and how those effects differ depending on whether the consumer is a saver or a borrower.

Correct AnswerverifiedAn increase in the real interest rate af...View AnswerShow Answer

Intertemporal Budget Constraint -Given the table above, suppose consumption in period two is $35,000. Then, the interest rate rises to five percent, and period-two consumption falls to $34,900. We may infer that ________.

Correct AnswerverifiedShow Answer

Discounting involves dividing next-period income by________.

Correct AnswerverifiedShow Answer

________ might cause the borrowing constraint to become non-binding, even though the consumer still cannot borrow.

Correct AnswerverifiedShow Answer

Advances in medical practice have increased both expected lifespans and medical expenditures. What does the life-cycle hypothesis predict as the macroeconomic consequences?

Correct AnswerverifiedAn extended lifespan implies more years ...View AnswerShow Answer

In 2008, the wealth of U.S. households fell by ________.

Correct AnswerverifiedShow Answer

Indifference curves tend to be convex because ________.

Correct AnswerverifiedShow Answer

Consumers who do not consistently discount the future over time behave in a fashion that is most consistent with ________.

Correct AnswerverifiedB

According to the permanent income hypothesis, the impact of ________.

Correct AnswerverifiedShow Answer

In practice, it is usual to assume that, in explaining the impact of a change in interest rates ________.

Correct AnswerverifiedShow Answer

If high incomes inspire more saving than low incomes ________.

Correct AnswerverifiedShow Answer

According to rational expectations, expectations will only change in the event that ________.

Correct AnswerverifiedShow Answer

Intertemporal Budget Constraint -Using the table above, and assuming no bequest, what amount of consumption is chosen in period 1, if the consumer wants consumption in the two periods to be equal? If initial wealth is $40,000, what amount of consumption is equal over the two periods?

Correct AnswerverifiedUse equati...View AnswerShow Answer

The rate at which a consumer is willing to give up consumption in one period for additional consumption in another is known as ________.

Correct AnswerverifiedShow Answer

How might consumers for whom the borrowing constraint is binding benefit from access to relatively expensive forms of credit (e.g., pawn shops and "payday" loans)?

Correct AnswerverifiedA binding borrowing constraint means tha...View AnswerShow Answer

The life-cycle hypothesis applies the concept of ________ to retirement.

Correct AnswerverifiedD

In the permanent income hypothesis, income is divided into ________.

Correct AnswerverifiedShow Answer

The recession of 2008-2009 demonstrated that ________.

Correct AnswerverifiedB

When the borrowing constraint is binding, ________.

Correct AnswerverifiedShow Answer

Indifference curves describe ________.

Correct AnswerverifiedShow Answer

Correct Answer
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An increase in the real interest rate af...
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An extended lifespan implies more years ...
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B

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Use equati...
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A binding borrowing constraint means tha...
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D

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B

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