Question 1

Forecast errors from the simple Keynesian consumption function, while less than $65 billion or 3 percent) in either direction,

Accepted Answer

A)  are really quite large for forecasting and policy purposes. 
B)  are really quite small for forecasting and policy purposes. 
C)  can result from swings in confidence or changes in tax policy. 
D)  both a and b. 
E)  both a and c. 
A)  are really quite large for forecasting and policy purposes. 
B)  are really quite small for forecasting and policy purposes. 
C)  can result from swings in confidence or changes in tax policy. 
D)  both a and b. 
E)  both a and c.

Question 2

Real GDP in the United States

Accepted Answer

A)  exceeds disposable personal income by 40 percent, because GDP includes taxes, retained earnings, and depreciation expenditures that are not part of personal income. 
B)  falls short of disposable personal income by 40 percent, because personal income includes transfer payments that are not directly linked to production. 
C)  almost exactly equals disposable personal income, because depreciation expenses are such a small fraction of gross investment in most years. 
D)  exceeds disposable personal income by over 50 percent because of the size of the federal budget. 
E)  none of the above. 
A)  exceeds disposable personal income by 40 percent, because GDP includes taxes, retained earnings, and depreciation expenditures that are not part of personal income. 
B)  falls short of disposable personal income by 40 percent, because personal income includes transfer payments that are not directly linked to production. 
C)  almost exactly equals disposable personal income, because depreciation expenses are such a small fraction of gross investment in most years. 
D)  exceeds disposable personal income by over 50 percent because of the size of the federal budget. 
E)  none of the above.

Question 3

Experience for the United States shows that

Accepted Answer

A)  consumption and GDP grow at about the same rate over the long term with GDP being less volatile over the short-term business cycle. 
B)  consumption grows slower than GDP over the long term with consumption being less volatile over the short-term business cycle. 
C)  consumption grows faster than GDP over the long term with consumption being more volatile over the short-term business cycle. 
D)  consumption and GDP grow at about the same rate over the long term with GDP being more volatile over the short-term business cycle. 
E)  consumption grows faster than GDP over the long term with GDP being more volatile over the short-term business cycle. 
A)  consumption and GDP grow at about the same rate over the long term with GDP being less volatile over the short-term business cycle. 
B)  consumption grows slower than GDP over the long term with consumption being less volatile over the short-term business cycle. 
C)  consumption grows faster than GDP over the long term with consumption being more volatile over the short-term business cycle. 
D)  consumption and GDP grow at about the same rate over the long term with GDP being more volatile over the short-term business cycle. 
E)  consumption grows faster than GDP over the long term with GDP being more volatile over the short-term business cycle.

Question 4

Let the consumption function be given by C = 80 + 0.9YDP with permanent disposable income specified according to YDP = 0.5YD + 0.3YD-1) + 0.2YD-2). Two years after a permanent increase in income of $1,000, consumption will have increased by

Accepted Answer

A)  $1,000. 
B)  $900. 
C)  $800. 
D)  $720. 
E)  $80. 
A)  $1,000. 
B)  $900. 
C)  $800. 
D)  $720. 
E)  $80.

Question 5

Let C = 100 + 0.85YDp) represent a consumption function depending on a notion of permanent income YDp) based on some undefined combination of disposable income lagged over the past six years. In this case, the long-run marginal propensity to consume would be

Accepted Answer

A)  0.85. 
B)  approximately equal to 0.85 but increased slightly by the lagged structure of permanent income. 
C)  approximately equal to 0.85 but reduced slightly by the lag structure of permanent income. 
D)  approximately equal to the lag coefficient of this year's disposable income in the definition of permanent income times 0.85 but reduced slightly by the rest of the lag structure of permanent income. 
E)  none of the above. 
A)  0.85. 
B)  approximately equal to 0.85 but increased slightly by the lagged structure of permanent income. 
C)  approximately equal to 0.85 but reduced slightly by the lag structure of permanent income. 
D)  approximately equal to the lag coefficient of this year's disposable income in the definition of permanent income times 0.85 but reduced slightly by the rest of the lag structure of permanent income. 
E)  none of the above.

Question 6

The difference between personal disposable income and GDP declines during recessions and expands during boom times because

Accepted Answer

A)  revenues collected by progressive income taxes climb faster than GDP during economic booms. 
B)  unemployment compensation payments and other transfer programs expand during recessions. 
C)  revenues collected by progressive income taxes fall faster than GDP during recessions. 
D)  unemployment compensation payments and other transfer programs contract during economic booms. 
E)  all of the above. 
A)  revenues collected by progressive income taxes climb faster than GDP during economic booms. 
B)  unemployment compensation payments and other transfer programs expand during recessions. 
C)  revenues collected by progressive income taxes fall faster than GDP during recessions. 
D)  unemployment compensation payments and other transfer programs contract during economic booms. 
E)  all of the above.

Question 7

In an economy with autonomous income taxes, an increase in the marginal propensity to consume is most accurately thought of as

Accepted Answer

A)  a leftward shift of the IS curve. 
B)  an increase in the interest sensitivity of the goods market. 
C)  a decrease in the interest sensitivity of the goods market. 
D)  both a and c. 
E)  both a and b. 
A)  a leftward shift of the IS curve. 
B)  an increase in the interest sensitivity of the goods market. 
C)  a decrease in the interest sensitivity of the goods market. 
D)  both a and c. 
E)  both a and b.

Question 8

Let the consumption function be given by C = 80 + 0.9YDP with permanent disposable income specified according to YDP = 0.5YD + 0.3YD-1) + 0.2YD-2). Which of the following is true?

Accepted Answer

A)  The long-run MPC = 0.45 while the short-run MPC = 0.9. 
B)  The long-run MPC = 0.9 while the short-run MPC = 0.45. 
C)  The long-run MPC = 1.0 while the short-run MPC = 0.9. 
D)  The long-run MPC = 0.9 while the sum of the short-run MPCs equals 1.0. 
E)  Both the long-run MPC and the short-run MPC equal 0.9. 
A)  The long-run MPC = 0.45 while the short-run MPC = 0.9. 
B)  The long-run MPC = 0.9 while the short-run MPC = 0.45. 
C)  The long-run MPC = 1.0 while the short-run MPC = 0.9. 
D)  The long-run MPC = 0.9 while the sum of the short-run MPCs equals 1.0. 
E)  Both the long-run MPC and the short-run MPC equal 0.9.

Question 9

Empirical evidence has suggested that saving in the United States is

Accepted Answer

A)  extremely sensitive to changes in the real rate of interest because the income effect on consumption of those changes is negligible. 
B)  extremely insensitive to changes in the real interest rate because the income effect on consumption of those changes dominates the substitution effect. 
C)  extremely insensitive to changes in the real interest rate because the substitution effect on consumption of those changes dominates the income effect. 
D)  extremely sensitive to changes in the real interest rate because the substitution effect of those changes on consumption is negligible. 
E)  none of the above. 
A)  extremely sensitive to changes in the real rate of interest because the income effect on consumption of those changes is negligible. 
B)  extremely insensitive to changes in the real interest rate because the income effect on consumption of those changes dominates the substitution effect. 
C)  extremely insensitive to changes in the real interest rate because the substitution effect on consumption of those changes dominates the income effect. 
D)  extremely sensitive to changes in the real interest rate because the substitution effect of those changes on consumption is negligible. 
E)  none of the above.

Question 10

Which of the following have been advanced to explain why estimates of the marginal propensity to consume out of temporary increments in income are too high relative to what the theory predicts?

Accepted Answer

A)  People overspend temporary windfalls because they do not believe that they are temporary. 
B)  People contract their consumption too far because they are liquidity constrained by their inability to borrow against their expected return to normal income levels. 
C)  People discount the future significantly when they make their intertemporal consumption decisions. 
D)  a and b only. 
E)  a, b, and c. 
A)  People overspend temporary windfalls because they do not believe that they are temporary. 
B)  People contract their consumption too far because they are liquidity constrained by their inability to borrow against their expected return to normal income levels. 
C)  People discount the future significantly when they make their intertemporal consumption decisions. 
D)  a and b only. 
E)  a, b, and c.

Question 11

Because the long-run marginal propensity to consume is

Accepted Answer

A)  smaller than the short-run marginal propensity to consume; consumption is more volatile over the business cycle than personal disposable income. 
B)  larger than the short-run marginal propensity to consume; consumption is less volatile over the business cycle than personal disposable income. 
C)  larger than the short-run marginal propensity to consume; consumption is more volatile over the business cycle than personal disposable income. 
D)  smaller than the short-run marginal propensity to consume; consumption is less volatile over the business cycle than personal disposable income. 
E)  identical to the short-run marginal propensity to consume. 
A)  smaller than the short-run marginal propensity to consume; consumption is more volatile over the business cycle than personal disposable income. 
B)  larger than the short-run marginal propensity to consume; consumption is less volatile over the business cycle than personal disposable income. 
C)  larger than the short-run marginal propensity to consume; consumption is more volatile over the business cycle than personal disposable income. 
D)  smaller than the short-run marginal propensity to consume; consumption is less volatile over the business cycle than personal disposable income. 
E)  identical to the short-run marginal propensity to consume.

Question 12

Suppose that an individual receives an unexpected, one-time windfall of
$1,000. To determine its effect on future consumption,

Accepted Answer

A)  preferences about the desirability of both steady consumption and the desired size of the bequest are required. 
B)  it would be necessary to know the desired size of the bequest, but the desirability of steady consumption is immaterial. 
C)  it would be necessary to know the value ascribed to steady consumption, but the desired size of the bequest is immaterial. 
D)  neither the desirability of steady consumption nor the desired size of the bequest is material because $1,000 is too small a sum to be affected by either. 
E)  none of the above. 
A)  preferences about the desirability of both steady consumption and the desired size of the bequest are required. 
B)  it would be necessary to know the desired size of the bequest, but the desirability of steady consumption is immaterial. 
C)  it would be necessary to know the value ascribed to steady consumption, but the desired size of the bequest is immaterial. 
D)  neither the desirability of steady consumption nor the desired size of the bequest is material because $1,000 is too small a sum to be affected by either. 
E)  none of the above.

Question 13

Suppose a permanent increase in disposable income were received by individuals with 25 years of working lifetime ahead of them before 10 years of retirement. If they expected positive real interest rates to prevail over the foreseeable future, then forward-looking consumption theory would predict a marginal propensity to consume of

Accepted Answer

A)  something less than 0.6 depending on expected real rates of interest. 
B)  exactly 0.6 regardless of the real rates of interest. 
C)  something over 0.6 but invariant to the real rates of interest. 
D)  something over 0.6 depending on the real rate of interest. 
E)  something over the "Keynesian" estimate of 0.91, but unspecified because of insufficient information. 
A)  something less than 0.6 depending on expected real rates of interest. 
B)  exactly 0.6 regardless of the real rates of interest. 
C)  something over 0.6 but invariant to the real rates of interest. 
D)  something over 0.6 depending on the real rate of interest. 
E)  something over the "Keynesian" estimate of 0.91, but unspecified because of insufficient information.

Question 14

Aggregate response to two significant, but temporary, tax adjustments made in the United States during the late 1960s and early 1970s suggests a marginal propensity to consume for temporary changes in income

Accepted Answer

A)  larger than the "Keynesian" long-run estimate of 0.94. 
B)  so far below the "Keynesian" long-run estimate of 0.94 that the forward- looking theoretical prediction of 0.05 to 0.1 is validated. 
C)  below the "Keynesian" estimate of 0.94 but above the theoretical predictions of 0.05 to 0.1. 
D)  that validates the applicability of the "Keynesian" long-run estimate of 0.94 for analyses of short-run phenomena. 
E)  identical to the forward-looking theoretical prediction of 0.16. 
A)  larger than the "Keynesian" long-run estimate of 0.94. 
B)  so far below the "Keynesian" long-run estimate of 0.94 that the forward- looking theoretical prediction of 0.05 to 0.1 is validated. 
C)  below the "Keynesian" estimate of 0.94 but above the theoretical predictions of 0.05 to 0.1. 
D)  that validates the applicability of the "Keynesian" long-run estimate of 0.94 for analyses of short-run phenomena. 
E)  identical to the forward-looking theoretical prediction of 0.16.

Question 15

Early in the 1980s, nominal interest rates on mortgages hovered in the 13 percent range even while inflation fell to the 5 percent range. Given the expectation that the Fed would keep inflation at 5 percent, a reasonable estimate of the real rate of interest would be

Accepted Answer

A)  4 percent. 
B)  5 percent. 
C)  8 percent. 
D)  13 percent. 
E)  18 percent. 
A)  4 percent. 
B)  5 percent. 
C)  8 percent. 
D)  13 percent. 
E)  18 percent.

Question 16

An intertemporal budget constraint allows families to

Accepted Answer

A)  enjoy greater financial flexibility over the course of several years than in any single year. 
B)  consume more over their lifetime than they receive in disposable income. 
C)  ignore the usual constraint of living within one's lifetime income. 
D)  enjoy greater financial flexibility in any single year than over the course of several years. 
E)  ignores the effect of asset accumulation resulting from saving over time. 
A)  enjoy greater financial flexibility over the course of several years than in any single year. 
B)  consume more over their lifetime than they receive in disposable income. 
C)  ignore the usual constraint of living within one's lifetime income. 
D)  enjoy greater financial flexibility in any single year than over the course of several years. 
E)  ignores the effect of asset accumulation resulting from saving over time.

Question 17

Statistical studies of the U.S. economy over the past three decades suggests a long-run marginal propensity to consume of

Accepted Answer

A)  11.2. 
B)  0.71. 
C)  0.51. 
D)  0.94. 
E)  1.01. 
A)  11.2. 
B)  0.71. 
C)  0.51. 
D)  0.94. 
E)  1.01.

Question 18

Which of the following functions might be an appropriate representation of a consumption function that reflects the implications of the forward-looking theory of consumption? In each, C represents consumption, Y represents income, and R represents the interest rate expressed in terms of a decimal fraction.

Accepted Answer

A)  C = 230 + 0.71Y + 1,000R. 
B)  C = 420 + 1.3Y - 1,000R. 
C)  C = 276 - 1.3Y - 1,000R. 
D)  C = 350 + 0.65Y - 1,500R. 
E)  C = 220 - 0.73Y + 1,500R. 
A)  C = 230 + 0.71Y + 1,000R. 
B)  C = 420 + 1.3Y - 1,000R. 
C)  C = 276 - 1.3Y - 1,000R. 
D)  C = 350 + 0.65Y - 1,500R. 
E)  C = 220 - 0.73Y + 1,500R.

Question 19

The recession of the early 1980s saw

Accepted Answer

A)  a mild drop in the rate of growth of GDP coupled with a surprisingly large contraction in consumption expenditure. 
B)  one of the most severe declines in GDP of the past 50 years matched in percentage terms by a corresponding reduction in consumption expenditure. 
C)  one of the most severe recessions of the past 50 years punctuated only briefly by a small reduction in consumption. 
D)  a mild contraction in the rate of growth of GDP matched by a small contraction in consumption expenditure. 
E)  none of the above. 
A)  a mild drop in the rate of growth of GDP coupled with a surprisingly large contraction in consumption expenditure. 
B)  one of the most severe declines in GDP of the past 50 years matched in percentage terms by a corresponding reduction in consumption expenditure. 
C)  one of the most severe recessions of the past 50 years punctuated only briefly by a small reduction in consumption. 
D)  a mild contraction in the rate of growth of GDP matched by a small contraction in consumption expenditure. 
E)  none of the above.

Question 20

Statistical investigations of the marginal propensity to consume have generated estimates that

Accepted Answer

A)  match the predictions of the theory pretty well in both the long run and the short run. 
B)  match the predictions of the theory in the short run but fall below numbers that would be consistent with the theory in the long run. 
C)  fall short of numbers that would be consistent with the theory in both the long run and the short run. 
D)  lie above numbers that would be consistent with the theory in the long run and below numbers that would be consistent with the theory in the short run. 
E)  none of the above. 
A)  match the predictions of the theory pretty well in both the long run and the short run. 
B)  match the predictions of the theory in the short run but fall below numbers that would be consistent with the theory in the long run. 
C)  fall short of numbers that would be consistent with the theory in both the long run and the short run. 
D)  lie above numbers that would be consistent with the theory in the long run and below numbers that would be consistent with the theory in the short run. 
E)  none of the above.

Forecast errors from the simple Keynesian consumption function, while less than $65 billion or 3 percent) in either direction,

Real GDP in the United States

Experience for the United States shows that

Let the consumption function be given by C = 80 + 0.9YDP with permanent disposable income specified according to YDP = 0.5YD + 0.3YD-1) + 0.2YD-2). Two years after a permanent increase in income of $1,000, consumption will have increased by

Let C = 100 + 0.85YDp) represent a consumption function depending on a notion of permanent income YDp) based on some undefined combination of disposable income lagged over the past six years. In this case, the long-run marginal propensity to consume would be

The difference between personal disposable income and GDP declines during recessions and expands during boom times because

In an economy with autonomous income taxes, an increase in the marginal propensity to consume is most accurately thought of as

Let the consumption function be given by C = 80 + 0.9YDP with permanent disposable income specified according to YDP = 0.5YD + 0.3YD-1) + 0.2YD-2). Which of the following is true?

Empirical evidence has suggested that saving in the United States is

Which of the following have been advanced to explain why estimates of the marginal propensity to consume out of temporary increments in income are too high relative to what the theory predicts?

Because the long-run marginal propensity to consume is

Suppose that an individual receives an unexpected, one-time windfall of $1,000. To determine its effect on future consumption,

Aggregate response to two significant, but temporary, tax adjustments made in the United States during the late 1960s and early 1970s suggests a marginal propensity to consume for temporary changes in income

Early in the 1980s, nominal interest rates on mortgages hovered in the 13 percent range even while inflation fell to the 5 percent range. Given the expectation that the Fed would keep inflation at 5 percent, a reasonable estimate of the real rate of interest would be

An intertemporal budget constraint allows families to

Statistical studies of the U.S. economy over the past three decades suggests a long-run marginal propensity to consume of

The recession of the early 1980s saw

Statistical investigations of the marginal propensity to consume have generated estimates that

Economic Growth, Fluctuation, and Policy

Measuring Economic Performance

Employment, Job Creation, and Job Destruction

Long-Run Economic Growth

Technology and Economic Growth

Growth and the World Economy

Short-Run Fluctuations

Financial Markets and Aggregate Demand

The Economic Fluctuations Model

Investment Demand

Foreign Trade and the Exchange Rate

Spending, Taxes, and the Budget Deficit

The Monetary System

The Microeconomic Foundations of Price Rigidity

The Macroeconomic Policy Model

The New Normative Macroeconomics

Macroeconomic Policy in the World Economy

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Exam 10: Consumption Demand

Forecast errors from the simple Keynesian consumption function, while less than $65 billion or 3 percent) in either direction,

Real GDP in the United States

Experience for the United States shows that

Let the consumption function be given by C = 80 + 0.9YDP with permanent disposable income specified according to YDP = 0.5YD + 0.3YD-1) + 0.2YD-2). Two years after a permanent increase in income of $1,000, consumption will have increased by

Let C = 100 + 0.85YDp) represent a consumption function depending on a notion of permanent income YDp) based on some undefined combination of disposable income lagged over the past six years. In this case, the long-run marginal propensity to consume would be

The difference between personal disposable income and GDP declines during recessions and expands during boom times because

In an economy with autonomous income taxes, an increase in the marginal propensity to consume is most accurately thought of as

Let the consumption function be given by C = 80 + 0.9YDP with permanent disposable income specified according to YDP = 0.5YD + 0.3YD-1) + 0.2YD-2). Which of the following is true?

Empirical evidence has suggested that saving in the United States is

Which of the following have been advanced to explain why estimates of the marginal propensity to consume out of temporary increments in income are too high relative to what the theory predicts?

Because the long-run marginal propensity to consume is

Suppose that an individual receives an unexpected, one-time windfall of $1,000. To determine its effect on future consumption,

Aggregate response to two significant, but temporary, tax adjustments made in the United States during the late 1960s and early 1970s suggests a marginal propensity to consume for temporary changes in income

Early in the 1980s, nominal interest rates on mortgages hovered in the 13 percent range even while inflation fell to the 5 percent range. Given the expectation that the Fed would keep inflation at 5 percent, a reasonable estimate of the real rate of interest would be

An intertemporal budget constraint allows families to

Statistical studies of the U.S. economy over the past three decades suggests a long-run marginal propensity to consume of

The recession of the early 1980s saw

Statistical investigations of the marginal propensity to consume have generated estimates that

Economic Growth, Fluctuation, and Policy

Measuring Economic Performance

Employment, Job Creation, and Job Destruction

Long-Run Economic Growth

Technology and Economic Growth

Growth and the World Economy

Short-Run Fluctuations

Financial Markets and Aggregate Demand

The Economic Fluctuations Model

Investment Demand

Foreign Trade and the Exchange Rate

Spending, Taxes, and the Budget Deficit

The Monetary System

The Microeconomic Foundations of Price Rigidity

The Macroeconomic Policy Model

The New Normative Macroeconomics

Macroeconomic Policy in the World Economy

Filters