Question 1

If the nominal interest rate is 3% and if prices fall by 2% per year, then the real rate of interest is approximately 5%.

Accepted Answer

A) True 
 B)False  False

Question 2

Samantha Smoothie's utility function is U(c1, c2) = c1c2, where c1 is her consumption in period 1 and c2 is her consumption in period 2. She earns $200 in period 1 and $220 in period 2. Samantha can borrow and lend at an interest rate of 10% and there is no inflation. The number of dollars that Samantha spends in the second period must be

Accepted Answer

A)  more than 200 but less than 220. 
B)  exactly 220. 
C)  more than 220. 
D)  exactly 200. 
E)  less than 200. 
A)  more than 200 but less than 220. 
B)  exactly 220. 
C)  more than 220. 
D)  exactly 200. 
E)  less than 200. C

Question 3

In an isolated mountain village, the harvest this year is 3,000 bushels of grain and the harvest next year will be 1,100 bushels. The villagers all have utility functions U(c1, c2) = c1c2, where c1 is consumption this year and c2 is consumption next year. Rats eat 10% of any grain that is stored for a year. How much grain could the villagers consume next year if they consume 1,000 bushels of grain this year?

Accepted Answer

A)  2,900 bushels 
B)  1,800 bushels 
C)  4,100 bushels 
D)  4,350 bushels 
E)  1,200 bushels 
A)  2,900 bushels 
B)  1,800 bushels 
C)  4,100 bushels 
D)  4,350 bushels 
E)  1,200 bushels A

Question 4

If the inflation rate doubles and the nominal interest rate remains constant, the real interest rate must be halved.

Accepted Answer

A) True 
 B)False

Question 5

Suppose that a person can borrow and lend at an interest rate of 10%. But there is a 5% rate of inflation and the person has to pay an income tax of 30% on all interest income. If the person borrows money, he can deduct interest as an expense. Where current consumption is on the horizontal axis and future consumption is on the vertical axis, the budget line will

Accepted Answer

A)  have a kink at the point of no saving or lending. 
B)  be a straight line with a slope of about -1.02. 
C)  be a straight line with a slope of about -1.05. 
D)  be a straight line with a slope of about -1.35. 
E)  None of the above. 
A)  have a kink at the point of no saving or lending. 
B)  be a straight line with a slope of about -1.02. 
C)  be a straight line with a slope of about -1.05. 
D)  be a straight line with a slope of about -1.35. 
E)  None of the above.

Question 6

Will Wisp will live for exactly two periods. His utility function is U(c1, c2) = c1c2, where c1 is consumption in period 1 and c2 is consumption in period 2. He will have no income in period 2. His income in period 1 is $40,000. If the interest rate rises from 10 to 14%:

Accepted Answer

A)  his savings will increase by 4% and his consumption in period 2 will increase. 
B)  his consumption in both periods will increase. 
C)  his consumption in both periods will decrease. 
D)  his savings will not change but his consumption in period 2 will increase by $800. 
E)  his consumption in period 1 will decrease by 14% and his consumption in period 2 will increase. 
A)  his savings will increase by 4% and his consumption in period 2 will increase. 
B)  his consumption in both periods will increase. 
C)  his consumption in both periods will decrease. 
D)  his savings will not change but his consumption in period 2 will increase by $800. 
E)  his consumption in period 1 will decrease by 14% and his consumption in period 2 will increase.

Question 7

Vanessa's utility function is   , where c1 is her consumption in period 1 and c2 is her consumption in period 2. In period 2, her income is 4 times as large as her income in period 1. At what interest rate will she choose to consume the same amount in period 2 as in period 1? (Choose the closest answer.)

Accepted Answer

A)  0.10 
B)  0 
C)  0.30 
D)  0.80 
E)  0.20 
A)  0.10 
B)  0 
C)  0.30 
D)  0.80 
E)  0.20

Question 8

If a consumer views a unit of consumption in period 1 as a perfect substitute (one for one) for a unit of consumption in period 2 and if the real interest rate is positive, the consumer will

Accepted Answer

A)  consume only in period 1. 
B)  consume only in period 2. 
C)  consume equal amounts in each period. 
D)  consume more in period 1 than in period 2 if income elasticity exceeds 1, otherwise consume more in period 2 than in period 1. 
E)  equalize expenditures but not consumption in the two periods. 
A)  consume only in period 1. 
B)  consume only in period 2. 
C)  consume equal amounts in each period. 
D)  consume more in period 1 than in period 2 if income elasticity exceeds 1, otherwise consume more in period 2 than in period 1. 
E)  equalize expenditures but not consumption in the two periods.

Question 9

Holly's utility function is   , where c1 is her consumption in period 1 and c2 is her consumption in period 2. In period 2, her income is twice as large as her income in period 1. At what interest rate will she choose to consume the same amount in period 2 as in period 1? (Choose the closest answer.)

Accepted Answer

A)  0.30 
B)  0.08 
C)  0.23 
D)  0 
E)  0.15 
A)  0.30 
B)  0.08 
C)  0.23 
D)  0 
E)  0.15

Question 10

Ymir Larson farms near Niffleheim, Minnesota. He works 80 hours a week. He can either grow rutabagas or raise pigs. Every hour that he spends growing rutabagas gives him $2 of income this year. Every hour that he spends raising pigs this year will add $4 to his income next year. In fact, next year's weekly income will be 100 + 4H dollars where H is the number of hours he spends raising pigs this year. Ymir's utility function is U(c1, c2) = min{c1, c2}, where c1 and c2 are his consumption expenditures this year and next year. Ymir doesn't believe in banks and will neither lend money nor borrow money.
a. Draw Ymir's budget line for current and future consumption, labeling key points on it.
b. How many hours a week will he choose to spend raising pigs?
c. How much money will he spend per week on consumption in each year?

Accepted Answer

a. His budget set is bounded b

Question 11

Peregrine consumes ($700, $880) and earns ($600, $990). If the interest rate is 0.10, the present value of his endowment is

Accepted Answer

A)  $1,590. 
B)  $1,500. 
C)  $1,580. 
D)  $3,150. 
E)  $3,750. 
A)  $1,590. 
B)  $1,500. 
C)  $1,580. 
D)  $3,150. 
E)  $3,750.

Question 12

Harvey Habit has a utility function U(c1, c2) = min{c1, c2}, where c1 and c2 are his consumption in periods 1 and 2 respectively. Harvey earns $147 in period 1 and he will earn $63 in period 2. Harvey can borrow or lend at an interest rate of 10%. There is no inflation.

Accepted Answer

A)  Harvey will save $102. 
B)  Harvey will borrow $40. 
C)  Harvey will neither borrow nor lend. 
D)  Harvey will save $40. 
E)  None of the above. 
A)  Harvey will save $102. 
B)  Harvey will borrow $40. 
C)  Harvey will neither borrow nor lend. 
D)  Harvey will save $40. 
E)  None of the above.

Question 13

If the interest rate is 5% and will be 5% forever, the present value of an income stream consisting of $10 a year paid to you on February 11 of every year, starting right now, is $210.

Accepted Answer

A) True 
 B)False

Question 14

I am always indifferent between a unit of consumption today and tomorrow and the interest rate is 5%.

Accepted Answer

A)  My intertemporal indifference curve is horizontal. 
B)  My intertemporal indifference curve is a straight line with slope 21. 
C)  I will spend all of my current and future income on consumption today. 
D)  I will spend 5% more on consumption today than on consumption tomorrow. 
E)  I will spend 5% more on consumption tomorrow than on consumption today. 
A)  My intertemporal indifference curve is horizontal. 
B)  My intertemporal indifference curve is a straight line with slope 21. 
C)  I will spend all of my current and future income on consumption today. 
D)  I will spend 5% more on consumption today than on consumption tomorrow. 
E)  I will spend 5% more on consumption tomorrow than on consumption today.

Question 15

An increase in the interest rate can make a utility-maximizing lender become a borrower.

Accepted Answer

A) True 
 B)False

Question 16

Buzz is a chicken farmer. His earnings will be $100 this year and $100 next year. He can lend money at an interest rate of 20%. Because of a subsidized loan program for chicken farmers, he can borrow money at an interest rate of 10%. No matter what he borrows or lends, his earnings will still be $100 each year.
a. If he is not allowed to either borrow or lend, draw a graph showing his budget between consumption this year and consumption next year. Put numerical labels on the vertical and horizontal intercepts of the budget set.
b. Suppose that Buzz is allowed to borrow up to the present value of next year's earnings at 10% and is also allowed to make loans. Draw Buzz's budget constraint in this case.

Accepted Answer

a. His budget line is kinked at (100, 10

Question 17

If the real rate of interest is 8% and the nominal rate of interest is 28%, then the rate of inflation must be about

Accepted Answer

A)  36%. 
B)  24.26%. 
C)  3.50%. 
D)  18.52%. 
E)  23%. 
A)  36%. 
B)  24.26%. 
C)  3.50%. 
D)  18.52%. 
E)  23%.

Question 18

In an isolated mountain village, the harvest this year is 6,000 bushels of grain and the harvest next year will be 900 bushels. The villagers all have utility functions U(c1, c2) = c1c2, where c1 is consumption this year and c2 is consumption next year. Rats eat 40% of any grain that is stored for a year. How much grain could the villagers consume next year if they consume 1,000 bushels of grain this year?

Accepted Answer

A)  5,850 bushels 
B)  3,000 bushels 
C)  3,900 bushels 
D)  6,900 bushels 
E)  1,000 bushels 
A)  5,850 bushels 
B)  3,000 bushels 
C)  3,900 bushels 
D)  6,900 bushels 
E)  1,000 bushels

Question 19

In an isolated peasant village, the only crop is corn. Good harvests alternate with bad harvests. This year the harvest will be 1,000 bushels. Next year it will be 150 bushels. There is no trade with the outside world. Corn can be stored, but rats will eat 25% of what is stored in a year. The villagers have the Cobb-Douglas utility function U(c1, c2) = c1c2, where c1 is consumption this year and c2 is consumption next year.
a. Draw a budget line for the village with this year's consumption on the horizontal axis and next year's consumption on the vertical axis. On your graph show the quantities at which the budget line intercepts the vertical and horizontal axes.
b. How much will the villagers consume this year?
c. How much will the rats eat?
d. How much will the villagers consume next year?

Accepted Answer

b. 600 bus

Question 20

If the price level increases by 80% in one year, then for the real rate of interest to be 10%, the nominal rate of interest would have to be

Accepted Answer

A)  98%. 
B)  70%. 
C)  18%. 
D)  88%. 
E)  72%. 
A)  98%. 
B)  70%. 
C)  18%. 
D)  88%. 
E)  72%.

Exam 9: Intertemporal Choice

If the nominal interest rate is 3% and if prices fall by 2% per year, then the real rate of interest is approximately 5%.

If the inflation rate doubles and the nominal interest rate remains constant, the real interest rate must be halved.

Will Wisp will live for exactly two periods. His utility function is U(c1, c2) = c1c2, where c1 is consumption in period 1 and c2 is consumption in period 2. He will have no income in period 2. His income in period 1 is $40,000. If the interest rate rises from 10 to 14%:

If a consumer views a unit of consumption in period 1 as a perfect substitute (one for one) for a unit of consumption in period 2 and if the real interest rate is positive, the consumer will

Holly's utility function is , where c1 is her consumption in period 1 and c2 is her consumption in period 2. In period 2, her income is twice as large as her income in period 1. At what interest rate will she choose to consume the same amount in period 2 as in period 1? (Choose the closest answer.)

Peregrine consumes ($700, $880) and earns ($600, $990). If the interest rate is 0.10, the present value of his endowment is

Harvey Habit has a utility function U(c1, c2) = min{c1, c2}, where c1 and c2 are his consumption in periods 1 and 2 respectively. Harvey earns $147 in period 1 and he will earn $63 in period 2. Harvey can borrow or lend at an interest rate of 10%. There is no inflation.

If the interest rate is 5% and will be 5% forever, the present value of an income stream consisting of $10 a year paid to you on February 11 of every year, starting right now, is $210.

I am always indifferent between a unit of consumption today and tomorrow and the interest rate is 5%.

An increase in the interest rate can make a utility-maximizing lender become a borrower.

If the real rate of interest is 8% and the nominal rate of interest is 28%, then the rate of inflation must be about

If the price level increases by 80% in one year, then for the real rate of interest to be 10%, the nominal rate of interest would have to be

Budget Constraint

A: Budget Constraint

Preferences

A: Preferences

Utility

A: Utility

Choice

A: Choice

Demand

A: Demand

Revealed Preference

A: Revealed Preference

Slutsky Equation

A: Slutsky Equation

Buying and Selling

A: Buying and Selling

A: Intertemporal Choice

Asset Markets

A: Asset Markets

Uncertainty

A: Uncertainty

Risky Assets

A: Risky Assets

Consumers Surplus

A: Consumers Surplus

Market Demand

A: Market Demand

Equilibrium

A: Equilibrium

Auctions

A: Auctions

Technology

A: Technology

Profit Maximization

A: Profit Maximization

Cost Minimization

A: Cost Minimization

Cost Curves

A: Cost Curves

Firm Supply

A: Firm Supply

Industry Supply

A: Industry Supply

Monopoly

A: Monopoly

Monopoly Behavior

A: Monopoly Behavior

Factor Markets

A: Factor Markets

Oligopoly

A: Oligopoly

Game Theory

A: Game Theory

Game Applications

A: Game Applications

Behavioral Economics

Exchange

A: Exchange

Production

A: Production

Welfare

A: Welfare

Externalities

A: Externalities

Information Technology

A: Information Technology

Public Goods

Will Wisp will live for exactly two periods. His utility function is U(c₁, c₂) = c₁c₂, where c₁ is consumption in period 1 and c₂ is consumption in period 2. He will have no income in period 2. His income in period 1 is $40,000. If the interest rate rises from 10 to 14%:

Harvey Habit has a utility function U(c₁, c₂) = min{c₁, c₂}, where c₁ and c₂ are his consumption in periods 1 and 2 respectively. Harvey earns $147 in period 1 and he will earn $63 in period 2. Harvey can borrow or lend at an interest rate of 10%. There is no inflation.