Question 1

Suppose current sales decrease by $150 million. Investment theory suggests that current investment must:

Accepted Answer

A)  decrease by more than $150 million. 
B)  decrease by less than $150 million. 
C)  decrease by about $150 million. 
D)  increase, but by less than $150 million. 
E)  More information is required. 
A)  decrease by more than $150 million. 
B)  decrease by less than $150 million. 
C)  decrease by about $150 million. 
D)  increase, but by less than $150 million. 
E)  More information is required. E

Question 2

A change in which of the following variables would affect the cash flow for a firm?

Accepted Answer

A)  Current profit. 
B)  Current expenditure on plant and equipment. 
C)  Total cost. 
D)  Total sales revenue. 
E)  Expected future profit. 
A)  Current profit. 
B)  Current expenditure on plant and equipment. 
C)  Total cost. 
D)  Total sales revenue. 
E)  Expected future profit. A

Question 3

The rental cost/ user cost of capital will increase when:

Accepted Answer

A)  the expected profit from the machine increases. 
B)  the rate of depreciation decreases. 
C)  the expected profit from the machine decreases. 
D)  the real interest rate increases. 
E)  the expected level of sales increases. 
A)  the expected profit from the machine increases. 
B)  the rate of depreciation decreases. 
C)  the expected profit from the machine decreases. 
D)  the real interest rate increases. 
E)  the expected level of sales increases. D

Question 4

As of 2007, some analysts were concerned that there was a "bubble" in the Australian housing market. Suppose there is a decrease in real estate prices. This fall in real estate prices would have the most direct effect on which of the following types of wealth?

Accepted Answer

A)  Financial wealth. 
B)  Housing wealth. 
C)  Human wealth. 
D)  Labour wealth. 
E)  Investment wealth. 
A)  Financial wealth. 
B)  Housing wealth. 
C)  Human wealth. 
D)  Labour wealth. 
E)  Investment wealth.

Question 5

Suppose there is an income tax cut. This tax cut would have a direct effect on which of the following?

Accepted Answer

A)  Financial wealth. 
B)  Housing wealth. 
C)  Human wealth. 
D)  Labour wealth. 
E)  Investment wealth. 
A)  Financial wealth. 
B)  Housing wealth. 
C)  Human wealth. 
D)  Labour wealth. 
E)  Investment wealth.

Question 6

Which of the following represents human wealth?

Accepted Answer

A)  Wealth that cannot be taken from a person, by law. 
B)  Financial wealth minus housing wealth. 
C)  The present discounted value of expected future after- tax labour income. 
D)  Total wealth minus housing wealth. 
E)  The sum of financial and housing wealth. 
A)  Wealth that cannot be taken from a person, by law. 
B)  Financial wealth minus housing wealth. 
C)  The present discounted value of expected future after- tax labour income. 
D)  Total wealth minus housing wealth. 
E)  The sum of financial and housing wealth.

Question 7

An increase in which of the following variables should cause an increase in profit per unit of capital?

Accepted Answer

A)  The ratio of total sales to the capital stock. 
B)  Total sales. 
C)  The ratio of total sales to total wages and salaries. 
D)  The capital stock. 
E)  Total wages and salaries. 
A)  The ratio of total sales to the capital stock. 
B)  Total sales. 
C)  The ratio of total sales to total wages and salaries. 
D)  The capital stock. 
E)  Total wages and salaries.

Question 8

Suppose there is an increase in income. This increase in income would have a direct effect on which of the following?

Accepted Answer

A)  Financial wealth. 
B)  Housing wealth. 
C)  Human wealth. 
D)  Labour wealth. 
E)  Investment wealth. 
A)  Financial wealth. 
B)  Housing wealth. 
C)  Human wealth. 
D)  Labour wealth. 
E)  Investment wealth.

Question 9

A panel dataset study of consumption behaviour by Venti and Wise for the U.S. finds that:

Accepted Answer

A)  most people are indifferent about saving sufficiently for retirement. 
B)  most people are forward- looking with many in the top income distribution leaving bequests. 
C)  most people are not able to save enough for retirement because of bad luck. 
D)  most people are backward- looking about consumption. 
E)  most people plan to a limited degree for retirement while concentrating on current consumption. 
A)  most people are indifferent about saving sufficiently for retirement. 
B)  most people are forward- looking with many in the top income distribution leaving bequests. 
C)  most people are not able to save enough for retirement because of bad luck. 
D)  most people are backward- looking about consumption. 
E)  most people plan to a limited degree for retirement while concentrating on current consumption.

Question 10

Which of the following would cause a decrease in human wealth?

Accepted Answer

A)  A decrease in the value of one's house. 
B)  A decrease in the value of one's stock portfolio. 
C)  A permanent decrease in salary. 
D)  All of the above. 
E)  None of the above. 
A)  A decrease in the value of one's house. 
B)  A decrease in the value of one's stock portfolio. 
C)  A permanent decrease in salary. 
D)  All of the above. 
E)  None of the above.

Question 11

Explain why current consumption is likely to respond less than one for one to changes in current income.

Accepted Answer

A change in current income is not likely

Question 12

Which of the following statements is true?

Accepted Answer

A)  A change in sales should have more impact on current investment if it is expected to be permanent rather than temporary. 
B)  Investment and consumption contribute equally to output fluctuations. 
C)  On a percentage basis, investment is more volatile than consumption. 
D)  All of the above. 
E)  None of the above. 
A)  A change in sales should have more impact on current investment if it is expected to be permanent rather than temporary. 
B)  Investment and consumption contribute equally to output fluctuations. 
C)  On a percentage basis, investment is more volatile than consumption. 
D)  All of the above. 
E)  None of the above.

Question 13

Suppose there is a decrease in profitability. This suggests that:

Accepted Answer

A)  the real interest rate has decreased. 
B)  firms have decreased their expectations of future profits. 
C)  the rate of depreciation has decreased. 
D)  All of the above. 
E)  None of the above. 
A)  the real interest rate has decreased. 
B)  firms have decreased their expectations of future profits. 
C)  the rate of depreciation has decreased. 
D)  All of the above. 
E)  None of the above.

Question 14

Explain why consumption and investment contribute roughly equally to output fluctuations when investment exhibits higher volatility than consumption.

Accepted Answer

Even though investment is more volatile

Question 15

Which of the following represents non- human wealth?

Accepted Answer

A)  Total wealth minus housing wealth. 
B)  Total wealth minus the present discounted value of expected future after- tax labour income. 
C)  Financial wealth minus housing wealth. 
D)  Wealth that cannot be taken from a person, by law. 
E)  Total wealth minus financial wealth. 
A)  Total wealth minus housing wealth. 
B)  Total wealth minus the present discounted value of expected future after- tax labour income. 
C)  Financial wealth minus housing wealth. 
D)  Wealth that cannot be taken from a person, by law. 
E)  Total wealth minus financial wealth.

Question 16

Which of the following is evidence that consumption depends on total wealth, and not just on current income?

Accepted Answer

A)  A series of phased- in tax cuts announced by the government causes little change in consumption. 
B)  People save very little for their retirement. 
C)  Banks will not always lend money to those who want to consume more than their income. 
D)  The anticipation of future financial distress makes some people reluctant to borrow. 
E)  A decrease in consumer confidence, with unchanged current income, often causes total consumption spending to fall. 
A)  A series of phased- in tax cuts announced by the government causes little change in consumption. 
B)  People save very little for their retirement. 
C)  Banks will not always lend money to those who want to consume more than their income. 
D)  The anticipation of future financial distress makes some people reluctant to borrow. 
E)  A decrease in consumer confidence, with unchanged current income, often causes total consumption spending to fall.

Question 17

A fall in sales will generally cause:

Accepted Answer

A)  initial decreases followed by increases in profit per unit of capital. 
B)  a decrease in profit per unit of capital. 
C)  no change in profit per unit of capital. 
D)  ambiguous effects on profit per unit of capital. 
E)  an increase in profit per unit of capital. 
A)  initial decreases followed by increases in profit per unit of capital. 
B)  a decrease in profit per unit of capital. 
C)  no change in profit per unit of capital. 
D)  ambiguous effects on profit per unit of capital. 
E)  an increase in profit per unit of capital.

Question 18

The rental cost/ user cost of capital will decrease when:

Accepted Answer

A)  the expected profit from the machine decreases. 
B)  the real interest rate increases. 
C)  the expected level of sales decreases. 
D)  the rate of depreciation decreases. 
E)  the expected profit from the machine increases. 
A)  the expected profit from the machine decreases. 
B)  the real interest rate increases. 
C)  the expected level of sales decreases. 
D)  the rate of depreciation decreases. 
E)  the expected profit from the machine increases.

Question 19

Which of the following people-none of whom has any financial or housing wealth-is most likely to be spending all of their current income?

Accepted Answer

A)  A high income person expecting to retire soon, and live for a long time afterward. 
B)  A low income person expecting continued low income throughout life. 
C)  A low income person expecting a dramatic rise in income in the future. 
D)  A high income person expecting a dramatic drop in income in the future. 
E)  A high income person expecting continued high income throughout life. 
A)  A high income person expecting to retire soon, and live for a long time afterward. 
B)  A low income person expecting continued low income throughout life. 
C)  A low income person expecting a dramatic rise in income in the future. 
D)  A high income person expecting a dramatic drop in income in the future. 
E)  A high income person expecting continued high income throughout life.

Question 20

Which of the following individuals is responsible for developing the permanent income theory of consumption?

Accepted Answer

A)  Keynes. 
B)  Friedman. 
C)  Lucas. 
D)  Modigliani. 
E)  Sargent. 
A)  Keynes. 
B)  Friedman. 
C)  Lucas. 
D)  Modigliani. 
E)  Sargent.

Exam 16: Expectations, Consumption and Investment

Suppose current sales decrease by $150 million. Investment theory suggests that current investment must:

A change in which of the following variables would affect the cash flow for a firm?

The rental cost/ user cost of capital will increase when:

As of 2007, some analysts were concerned that there was a "bubble" in the Australian housing market. Suppose there is a decrease in real estate prices. This fall in real estate prices would have the most direct effect on which of the following types of wealth?

Suppose there is an income tax cut. This tax cut would have a direct effect on which of the following?

Which of the following represents human wealth?

An increase in which of the following variables should cause an increase in profit per unit of capital?

Suppose there is an increase in income. This increase in income would have a direct effect on which of the following?

A panel dataset study of consumption behaviour by Venti and Wise for the U.S. finds that:

Which of the following would cause a decrease in human wealth?

Explain why current consumption is likely to respond less than one for one to changes in current income.

Which of the following statements is true?

Suppose there is a decrease in profitability. This suggests that:

Explain why consumption and investment contribute roughly equally to output fluctuations when investment exhibits higher volatility than consumption.

Which of the following represents non- human wealth?

Which of the following is evidence that consumption depends on total wealth, and not just on current income?

A fall in sales will generally cause:

The rental cost/ user cost of capital will decrease when:

Which of the following people-none of whom has any financial or housing wealth-is most likely to be spending all of their current income?

Which of the following individuals is responsible for developing the permanent income theory of consumption?

A Tour of the World

A Tour of the Book

The Goods Market

Financial Markets

Goods and Financial Markets: the Islm Model

The Labour Market

Putting All Markets Together: the Asad Model

The Phillips Curve, the Natural Rate of Unemployment and Inflation

The Crisis

The Facts of Growth

Saving, Capital Accumulation and Output

Technological Progress and Growth

Technological Progress: the Short, the Medium and the Long Run

Expectations: the Basic Tools

Financial Markets and Expectations

Expectations, Output and Policy

Openness in Goods and Financial Markets

The Goods Market

Output, the Interest Rate and the Exchange Rate

Exchange Rate Regimes

Should Policy-Makers Be Restrained

Fiscal Policy: a Summing up

Monetary Policy: a Summing up

Epilogue: the Story of Macroeconomics

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