Question 1

Explain why current consumption might change even if current income does not change.

Accepted Answer

Consumption also depends on wealth and c

Question 2

Which of the following best defines total wealth?

Accepted Answer

A)  Human wealth only. 
B)  Non- human wealth only. 
C)  Non- human wealth and human wealth. 
D)  Financial wealth and housing wealth only. 
E)  Financial wealth only. 
A)  Human wealth only. 
B)  Non- human wealth only. 
C)  Non- human wealth and human wealth. 
D)  Financial wealth and housing wealth only. 
E)  Financial wealth only.

Question 3

First, briefly explain what the user cost or rental cost of capital represents. Second, explain what factors would cause an increase in user cost or rental cost of capital.

Accepted Answer

The user cost of capital is the sum of t

Question 4

The study by Venti and Wise shows that most of the wealth of people aged 65- 69 consists of:

Accepted Answer

A)  stocks and bonds. 
B)  social security benefits. 
C)  home equity. 
D)  personal retirement assets. 
E)  employer- provided pension. 
A)  stocks and bonds. 
B)  social security benefits. 
C)  home equity. 
D)  personal retirement assets. 
E)  employer- provided pension.

Question 5

A decrease in which of the following variables will cause a decrease in the user cost of capital?

Accepted Answer

A)  t Kt. 
B)  IIt. 
C)  II e . 
D)  Yt. 
E)  rt. 
A)  t Kt. 
B)  IIt. 
C)  II e . 
D)  Yt. 
E)  rt.

Question 6

Consumption is most likely to respond one- for- one with changes in current income when:

Accepted Answer

A)  people are able to borrow as much as they wish, as long as they pay it back. 
B)  the change in current income is caused by the business cycle. 
C)  people believe the change in their current income is permanent. 
D)  the change in current income results from a one- time government handout. 
E)  people believe the change in their current income is temporary. 
A)  people are able to borrow as much as they wish, as long as they pay it back. 
B)  the change in current income is caused by the business cycle. 
C)  people believe the change in their current income is permanent. 
D)  the change in current income results from a one- time government handout. 
E)  people believe the change in their current income is temporary.

Question 7

A painting is currently worth $150,000, and is expected to maintain its real value for four years. The real interest rate is expected to remain constant at 8%. What is the present value of the painting's expected price at the end of the fourth year?

Accepted Answer

A)  $100,254. 
B)  $90,254. 
C)  $80,254. 
D)  $110,254. 
E)  $70,254. 
A)  $100,254. 
B)  $90,254. 
C)  $80,254. 
D)  $110,254. 
E)  $70,254.

Question 8

Explain what decisions and calculations a very foresighted consumer must make to determine her consumption decisions in any period.

Accepted Answer

An individual would have to calculate he

Question 9

Suppose you are given a rare antique painting by a long- lost relative. The value of this rare antique painting would be included in 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 10

The fall in stock prices during the global crisis in 2008 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 11

Which of the following will occur when the capital stock falls?

Accepted Answer

A)  There will be no change in profit per unit of capital. 
B)  Profit per unit of capital will decrease. 
C)  Profit per unit of capital will increase. 
D)  Profit per unit of capital initially decreases followed by increases. 
E)  There will be an ambiguous effect on profit per unit of capital. 
A)  There will be no change in profit per unit of capital. 
B)  Profit per unit of capital will decrease. 
C)  Profit per unit of capital will increase. 
D)  Profit per unit of capital initially decreases followed by increases. 
E)  There will be an ambiguous effect on profit per unit of capital.

Question 12

Explain what decisions and calculations a firm must make when it is considering the purchase of new capital (i.e., making an investment decision).

Accepted Answer

A firm must form expectations of future

Question 13

Suppose firms expect future output to be higher and future interest rates to be higher. Given this information, how will firms alter investment in the current period? Explain.

Accepted Answer

The increase in expected future output w

Question 14

Assume that consumption decisions are made according to the permanent income theory. Which of the following would lead to the largest increase in current consumption?

Accepted Answer

A)  Winning $10,000 in the lottery. 
B)  Obtaining $10,000 by winning a lawsuit. 
C)  Getting a one- time $10,000 bonus from your employer. 
D)  Taking a new job with a salary that is $10,000 higher than your current salary. 
E)  Inheriting $10,000 from a relative. 
A)  Winning $10,000 in the lottery. 
B)  Obtaining $10,000 by winning a lawsuit. 
C)  Getting a one- time $10,000 bonus from your employer. 
D)  Taking a new job with a salary that is $10,000 higher than your current salary. 
E)  Inheriting $10,000 from a relative.

Question 15

Which of the following individuals is responsible for developing the life cycle theory of consumption?

Accepted Answer

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

Question 16

Explain why consumption is less volatile than investment.

Accepted Answer

At most, we would observe a one- for- on

Question 17

Discuss the various components of wealth.

Accepted Answer

Total wealth comprises non- human wealth

Question 18

Suppose individuals expect future output to be lower and future interest rates to be lower. Given this information, how will individuals alter consumption in the current period? Explain.

Accepted Answer

The effects are ambiguous. The decrease

Question 19

Which of the following statements about consumption and investment is correct?

Accepted Answer

A)  A temporary change in income will have a relatively larger effect on consumption than on investment. 
B)  A permanent change in income will have a relatively larger effect on consumption than on investment. 
C)  Consumption is more volatile than investment. 
D)  Investment and consumption exhibit approximately the same degree of volatility. 
E)  Investment is more volatile than consumption. 
A)  A temporary change in income will have a relatively larger effect on consumption than on investment. 
B)  A permanent change in income will have a relatively larger effect on consumption than on investment. 
C)  Consumption is more volatile than investment. 
D)  Investment and consumption exhibit approximately the same degree of volatility. 
E)  Investment is more volatile than consumption.

Question 20

Suppose that, when the price of steel drops, steel companies tend to cut back on investment in their non- steel activities more than other firms in these same non- steel activities. This would support the idea that:

Accepted Answer

A)  business firms do not care about interest rates. 
B)  cash flow does not matter for investment. 
C)  business firms do not care about profit. 
D)  business firms do not use discounting. 
E)  cash flow matters for investment. 
A)  business firms do not care about interest rates. 
B)  cash flow does not matter for investment. 
C)  business firms do not care about profit. 
D)  business firms do not use discounting. 
E)  cash flow matters for investment.

Exam 16: Expectations, Consumption and Investment

Explain why current consumption might change even if current income does not change.

Which of the following best defines total wealth?

First, briefly explain what the user cost or rental cost of capital represents. Second, explain what factors would cause an increase in user cost or rental cost of capital.

The study by Venti and Wise shows that most of the wealth of people aged 65- 69 consists of:

A decrease in which of the following variables will cause a decrease in the user cost of capital?

Consumption is most likely to respond one- for- one with changes in current income when:

A painting is currently worth $150,000, and is expected to maintain its real value for four years. The real interest rate is expected to remain constant at 8%. What is the present value of the painting's expected price at the end of the fourth year?

Explain what decisions and calculations a very foresighted consumer must make to determine her consumption decisions in any period.

Suppose you are given a rare antique painting by a long- lost relative. The value of this rare antique painting would be included in which of the following?

The fall in stock prices during the global crisis in 2008 would have the most direct effect on which of the following types of wealth?

Which of the following will occur when the capital stock falls?

Explain what decisions and calculations a firm must make when it is considering the purchase of new capital (i.e., making an investment decision).

Suppose firms expect future output to be higher and future interest rates to be higher. Given this information, how will firms alter investment in the current period? Explain.

Assume that consumption decisions are made according to the permanent income theory. Which of the following would lead to the largest increase in current consumption?

Which of the following individuals is responsible for developing the life cycle theory of consumption?

Explain why consumption is less volatile than investment.

Discuss the various components of wealth.

Suppose individuals expect future output to be lower and future interest rates to be lower. Given this information, how will individuals alter consumption in the current period? Explain.

Which of the following statements about consumption and investment is correct?

Suppose that, when the price of steel drops, steel companies tend to cut back on investment in their non- steel activities more than other firms in these same non- steel activities. This would support the idea that:

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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