Exam 16: Consumption and Investment

Samantha's wealth is $100 000,she expects to work for another 30 years at a constant salary of $200 000 and live for another 50 years.Assume yearly taxes are $50 000 and that Samantha completely smooths consumption over her lifetime.Calculate the following: a. Samantha's annual consumption b. Samantha's annual consumption if she receives a one-time tax rebate of $10 000 during her first year of work c. The amount of the tax rebate that Samantha will save during her first year of work

Households in Canada more completely smooth out expenditures on

The intertemporal budget constraint tells us that

The substitution effect indicates that higher real interest rates ________ current consumption for households who are lenders and ________ current consumption for households who are borrowers.

John Maynard Keynes described periods of irrational pessimism and optimism that affect the investment behaviour of firms as animal spirits.When considering the investment behaviour of firms,animal spirits can be thought of as changes in the

Figure 16.1 -Refer to Figure 16.1.An increase in the corporate tax rate is best represented by a movement from

Hector's wealth is zero,he expects to work for another 45 years at a constant salary of ?$80 000 and live for another 60 years.Assuming taxes are zero,if Hector completely smooths consumption over his lifetime,his annual consumption is

Hector's wealth is zero,he expects to work for another 45 years at a constant salary of ?$80 000 and live for another 60 years.If Hector receives a $20 000 bonus during his first year of work and he completely smooths consumption over his lifetime,his marginal propensity to consume out of a transitory increase in income is

According to the permanent-income hypothesis,a transitory increase in a person's income will

Explain why asymmetric information can cause the real interest rate to increase,and why increases in the real interest rate can actually make lending more risky for financial institutions.

In Canada,the growth rate of expenditures has been most volatile for

Figure 16.1 -Refer to Figure 16.1.A decrease in the real price of capital goods is best represented by a movement from

Explain the permanent-income hypothesis and the life-cycle hypothesis.How are these hypotheses similar?

Credit rationing and the financial accelerator are responsible,in part,for

For each of the following changes,explain what will happen to the expected marginal product of capital curve or the user cost of capital curve,and what will happen to the desired capital stock: a. The real price of capital goods increases. b. The depreciation rate increases. c. The corporate income tax rate decreases. d. The real interest rate decreases. e. Expected future output decreases.

Suppose the government decides to decrease the amount of investment spending that firms are allowed to depreciate for tax purposes from 50% to 25%,effective next year.What effect should this change have on the desired capital stock and the level of investment spending next year? Use a graph to explain your answer.

The president of the hypothetical country of Accordia implements a temporary two-year tax cut on income taxes.According to the permanent-income hypothesis,these tax cuts would represent ________ income and would have ________ on consumption.

Figure 16.1 -Refer to Figure 16.1.An increase in expected output in the future is best represented by a movement from

Figure 16.1 -Refer to Figure 16.1.If a firm expects that consumer preference for its product will increase in the future,this is best represented by a movement from

During recessions,the value of collateral decreases and corporate profits decrease,so firms do not have cash to finance new investment projects.Therefore,credit rationing depends on the state of the economy.This situation is known as the