Question 1

Assume a worker at age 25 with annual earnings of $45,000 who wants to retire at age 65 and expects to live until age 75.How much would the worker consume annually?

Accepted Answer

A) $40,000 
B) $36,000 
C) $32,000 
D) $30,000 
E) $28,000 
A) $40,000 
B) $36,000 
C) $32,000 
D) $30,000 
E) $28,000 B

Question 2

If a worker gets a large one-time Christmas bonus, most likely the following will occur:

Accepted Answer

A) an immediate substantial increase in family consumption 
B) permanent family income will increase substantially 
C) transitory family income will not be affected 
D) family saving will increase that year 
E) all of the above 
A) an immediate substantial increase in family consumption 
B) permanent family income will increase substantially 
C) transitory family income will not be affected 
D) family saving will increase that year 
E) all of the above D

Question 3

Assume the government announces an income tax surcharge of 10% for next year only and the Fed announces that it will keep interest rates constant.What effect do you think this will have on the economy?

Accepted Answer

A) households will immediately curtail their spending and aggregate demand will decline significantly, causing a recession 
B) households will reduce their spending significantly starting next year 
C) households will not significantly alter their spending behavior this or next year and the effect on the economy will be minimal 
D) households will spend a lot more this year, causing a temporary boom 
E) households will save a lot more this year so they won't have to reduce their spending next year 
A) households will immediately curtail their spending and aggregate demand will decline significantly, causing a recession 
B) households will reduce their spending significantly starting next year 
C) households will not significantly alter their spending behavior this or next year and the effect on the economy will be minimal 
D) households will spend a lot more this year, causing a temporary boom 
E) households will save a lot more this year so they won't have to reduce their spending next year C

Question 4

The fact that consumption exhibits "excess sensitivity" implies that consumption

Accepted Answer

A) responds too strongly to predictable changes in income 
B) responds too little to predictable changes in income 
C) responds too little to surprise changes in income 
D) is never affected by liquidity constraints 
E) never behaves as Keynes predicted 
A) responds too strongly to predictable changes in income 
B) responds too little to predictable changes in income 
C) responds too little to surprise changes in income 
D) is never affected by liquidity constraints 
E) never behaves as Keynes predicted

Question 5

The random-walk theory of consumption predicts that

Accepted Answer

A) the slope of a line relating C(t+1)to C(t)is equal to 1 
B) the slope of a line relating C(t+1) to C(t) is equal to 0 
C) the slope of a line relating C(t+1) to C(t) is close to 0 
D) the slope of a line relating C(t)to Y(t)is close to 1 
E) none of the above 
A) the slope of a line relating C(t+1)to C(t)is equal to 1 
B) the slope of a line relating C(t+1) to C(t) is equal to 0 
C) the slope of a line relating C(t+1) to C(t) is close to 0 
D) the slope of a line relating C(t)to Y(t)is close to 1 
E) none of the above

Question 6

The life-cycle theory of consumption implies that

Accepted Answer

A) the mpc out of wealth is very small 
B) the mpc out of permanent income is larger than the mpc out of transitory income 
C) a large change in stock values can affect the economy, but the effect is fairly small 
D) an individual's mpc out of permanent income changes with age 
E) all of the above 
A) the mpc out of wealth is very small 
B) the mpc out of permanent income is larger than the mpc out of transitory income 
C) a large change in stock values can affect the economy, but the effect is fairly small 
D) an individual's mpc out of permanent income changes with age 
E) all of the above

Question 7

Liquidity constraints explain

Accepted Answer

A) why consumers may spend less than the permanent-income theory predicts as their current income falls 
B) why consumption may increase more than the life-cycle hypothesis predicts when income recovers after a recession 
C) why consumers may sometimes behave in a manner predicted by the simple Keynesian consumption function 
D) all of the above 
E) none of the above 
A) why consumers may spend less than the permanent-income theory predicts as their current income falls 
B) why consumption may increase more than the life-cycle hypothesis predicts when income recovers after a recession 
C) why consumers may sometimes behave in a manner predicted by the simple Keynesian consumption function 
D) all of the above 
E) none of the above

Question 8

According to the permanent-income theory of consumption

Accepted Answer

A) permanent income is always lower than transitory income 
B) the mpc out permanent income is close to zero 
C) the mpc out of transitory income is close to 1 
D) all of the above 
E) none of the above 
A) permanent income is always lower than transitory income 
B) the mpc out permanent income is close to zero 
C) the mpc out of transitory income is close to 1 
D) all of the above 
E) none of the above

Question 9

The debate about different consumption theories can be viewed as a debate over whether

Accepted Answer

A) the consumption of durable or non-durable goods should be considered 
B) random events that can change consumption behavior really do occur 
C) liquidity constraints do ever exist 
D) the marginal propensity to consume is large or small 
E) the average propensity to consume is less or greater than 1 
A) the consumption of durable or non-durable goods should be considered 
B) random events that can change consumption behavior really do occur 
C) liquidity constraints do ever exist 
D) the marginal propensity to consume is large or small 
E) the average propensity to consume is less or greater than 1

Question 10

The Barro-Ricardo equivalence proposition

Accepted Answer

A) states that debt-financing merely postpones taxation and therefore in many instances is equivalent to current taxation 
B) relies on the absence of liquidity constraints and the presence of an operational bequest motive 
C) implies that a cut in current taxes that carries with it an implied increase in future taxes will lead to an increase in private saving 
D) was not supported by events of the 1980s as taxes were cut, budget deficits increased, and private saving declined 
E) all of the above 
A) states that debt-financing merely postpones taxation and therefore in many instances is equivalent to current taxation 
B) relies on the absence of liquidity constraints and the presence of an operational bequest motive 
C) implies that a cut in current taxes that carries with it an implied increase in future taxes will lead to an increase in private saving 
D) was not supported by events of the 1980s as taxes were cut, budget deficits increased, and private saving declined 
E) all of the above

Question 11

The Barro-Ricardo equivalence proposition implies that tax cuts

Accepted Answer

A) always lead to a reduction in the budget deficit 
B) always lead to the crowding out of investment spending 
C) that lead to higher budget deficits do not stimulate consumption since people will save in anticipation of future tax increases 
D) provide important incentives for economic growth 
E) ease people's liquidity constraints so they consume more 
A) always lead to a reduction in the budget deficit 
B) always lead to the crowding out of investment spending 
C) that lead to higher budget deficits do not stimulate consumption since people will save in anticipation of future tax increases 
D) provide important incentives for economic growth 
E) ease people's liquidity constraints so they consume more

Question 12

The proposition that financing debt by issuing bonds merely postpones taxation and is therefore in many instances equivalent to current taxation is known as the

Accepted Answer

A) balanced budget theorem 
B) rational expectations proposition 
C) Barro-Ricardo equivalence proposition 
D) Reagan theory of taxation 
E) none of the above 
A) balanced budget theorem 
B) rational expectations proposition 
C) Barro-Ricardo equivalence proposition 
D) Reagan theory of taxation 
E) none of the above

Question 13

Empirical studies of aggregate consumption have shown that

Accepted Answer

A) 100% of the variation in consumption can be explained by changes in current income 
B) wealth effects generally account for only a small amount of consumer expenditures 
C) wealth effects generally are very large, which explains the large variations in consumption from year to year 
D) changes in wealth have a bigger impact on consumption than changes in income 
E) the marginal propensity to consume out of wealth is close to one 
A) 100% of the variation in consumption can be explained by changes in current income 
B) wealth effects generally account for only a small amount of consumer expenditures 
C) wealth effects generally are very large, which explains the large variations in consumption from year to year 
D) changes in wealth have a bigger impact on consumption than changes in income 
E) the marginal propensity to consume out of wealth is close to one

Question 14

Consumption is an important element of aggregate demand because it

Accepted Answer

A) is the most volatile component of GDP 
B) accounts for roughly 70 percent of GDP 
C) is very interest sensitive 
D) is greatly affected by stock market activity 
E) all of the above 
A) is the most volatile component of GDP 
B) accounts for roughly 70 percent of GDP 
C) is very interest sensitive 
D) is greatly affected by stock market activity 
E) all of the above

Question 15

If the interest rate increases,

Accepted Answer

A) consumption of non-durable goods will decrease substantially 
B) saving will increase substantially 
C)  consumption of durable goods will increase substantially 
D) both B and C 
E) none of the above 
A) consumption of non-durable goods will decrease substantially 
B) saving will increase substantially 
C)  consumption of durable goods will increase substantially 
D) both B and C 
E) none of the above

Question 16

According to the permanent-income theory, which of the following would have the greatest impact on the current consumption of a 45 year-old tenured college professor?

Accepted Answer

A) a promotion to full professor combined with a $5,000 raise 
B) a $5,100 advance payment for a book that will take two years to write 
C) winning $5,200 in the Reader's Digest Sweepstakes 
D) a loss of a stamp collection worth $5,400 
E) an inheritance of $5,500 from a distant uncle 
A) a promotion to full professor combined with a $5,000 raise 
B) a $5,100 advance payment for a book that will take two years to write 
C) winning $5,200 in the Reader's Digest Sweepstakes 
D) a loss of a stamp collection worth $5,400 
E) an inheritance of $5,500 from a distant uncle

Question 17

The Barro-Ricardo equivalence proposition relies on

Accepted Answer

A) the presence of an operational bequest motive 
B)  the absence of liquidity constraints 
C)  the presence of liquidity constraints 
D) both A and B 
E) both A and C 
A) the presence of an operational bequest motive 
B)  the absence of liquidity constraints 
C)  the presence of liquidity constraints 
D) both A and B 
E) both A and C

Question 18

Which of the following theories of consumption behavior was introduced by Milton Friedman?

Accepted Answer

A) the absolute-income hypothesis 
B) the relative-income hypothesis 
C) the permanent-income hypothesis 
D) the life-cycle hypothesis 
E) the random-walk hypothesis 
A) the absolute-income hypothesis 
B) the relative-income hypothesis 
C) the permanent-income hypothesis 
D) the life-cycle hypothesis 
E) the random-walk hypothesis

Question 19

In the Fisher diagram, which gives a microeconomic explanation of why an increase in the rate of interest (i) can lead to either an increase or a decrease in current consumption, the budget constraint can be formulated as

Accepted Answer

A)    
B)    
C)    
D)    
E)    
A)    
B)    
C)    
D)    
E)

Question 20

What does the permanent-income theory of consumption predict you would most likely do with $25,000 that you just won on a TV game show?

Accepted Answer

A) travel throughout Europe and eat in five-star restaurants 
B) invite all your friends to a big bash 
C) put the money in the bank to finance your next year in college 
D) take a trip to Las Vegas to try and double your winnings 
E) none of the above 
A) travel throughout Europe and eat in five-star restaurants 
B) invite all your friends to a big bash 
C) put the money in the bank to finance your next year in college 
D) take a trip to Las Vegas to try and double your winnings 
E) none of the above

Exam 14: Consumption and saving

Assume a worker at age 25 with annual earnings of $45,000 who wants to retire at age 65 and expects to live until age 75.How much would the worker consume annually?

If a worker gets a large one-time Christmas bonus, most likely the following will occur:

Assume the government announces an income tax surcharge of 10% for next year only and the Fed announces that it will keep interest rates constant.What effect do you think this will have on the economy?

The fact that consumption exhibits "excess sensitivity" implies that consumption

The random-walk theory of consumption predicts that

The life-cycle theory of consumption implies that

Liquidity constraints explain

According to the permanent-income theory of consumption

The debate about different consumption theories can be viewed as a debate over whether

The Barro-Ricardo equivalence proposition

The Barro-Ricardo equivalence proposition implies that tax cuts

The proposition that financing debt by issuing bonds merely postpones taxation and is therefore in many instances equivalent to current taxation is known as the

Empirical studies of aggregate consumption have shown that

Consumption is an important element of aggregate demand because it

If the interest rate increases,

According to the permanent-income theory, which of the following would have the greatest impact on the current consumption of a 45 year-old tenured college professor?

The Barro-Ricardo equivalence proposition relies on

Which of the following theories of consumption behavior was introduced by Milton Friedman?

In the Fisher diagram, which gives a microeconomic explanation of why an increase in the rate of interest (i) can lead to either an increase or a decrease in current consumption, the budget constraint can be formulated as

What does the permanent-income theory of consumption predict you would most likely do with $25,000 that you just won on a TV game show?

Introduction

National income accounting

Growth and accumulation

Growth and policy

Aggregate supply and demand

Aggregate supply and the phillips curve

Unemployment

Inflation

Policy preview

Income and spending

Money, interest, and income

Monetary and fiscal policy

International linkages

Investment spending

The demand for money

The fed, money, and credit

Policy

Financial markets and asset prices

The national debt

Recession and depression

Inflation and hyperinflation

International adjustment and interdependence

Advanced topics

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