Question 1

If the real rate of interest is 12% and the nominal rate of interest is 31%,then the rate of inflation must be about

Accepted Answer

A)  27.26%. 
B)  43%. 
C)  2.58%. 
D)  16.96%. 
E)  22%. 
A)  27.26%. 
B)  43%. 
C)  2.58%. 
D)  16.96%. 
E)  22%. B

Question 2

Minnie has an income of $300 in period 1 and will have an income of $625 in period 2.Her utility function is U(c1,c2)=c0.801c0.202,where c1 is her consumption in period 1 and c2 is her consumption in period 2.The interest rate is 0.25.If she unexpectedly won a lottery which pays its prize in period 2 so that her income in period 2 would be $1,250 and her income in period 1 would remain $300,then her consumption in period 1 would

Accepted Answer

A)  double. 
B)  increase by $400. 
C)  increase by $150. 
D)  stay constant. 
E)  increase by $120. 
A)  double. 
B)  increase by $400. 
C)  increase by $150. 
D)  stay constant. 
E)  increase by $120. B

Question 3

Holly's utility function is U(c1,c2)=c1/21+0.87c1/22,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 E

Question 4

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 5

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 (100,100)

Question 6

Susan is a net borrower when the interest rate is 10% and a net saver when the interest rate is 20%.A decrease in the interest rate from 20% to 10% may make Susan worse off.

Accepted Answer

A) True 
 B)False

Question 7

Ophelia says,"If I could lend money at the rates I must pay to borrow,I would.And if I could borrow money at the rates I receive when I lend,I would again.But forsooth,although I spend,I neither borrow nor lend." Contrary to common belief,Ophelia is entirely rational.Draw a diagram to show how Ophelia's remarks can be consistent with rational behavior and smooth convex preferences if she pays a different interest rate when she borrows than she gets when she lends.Explain what happens in words.

Accepted Answer

Ophelia's budget between current and fut

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

It would be a mistake to choose the investment that maximizes the present value of your income stream unless you planned to spend your entire wealth in the current time period.

Accepted Answer

A) True 
 B)False

Question 10

Harvey Habit has a utility function U(c1,c2)=min{c1,c2}.If he had an income of $880 in period 1 and $1,320 in period 2 and if the interest rate were 0.20,how much would Harvey choose to spend on bread in period 1?

Accepted Answer

A)  $1,620 
B)  $360 
C)  $540 
D)  $2,160 
E)  $1,080 
A)  $1,620 
B)  $360 
C)  $540 
D)  $2,160 
E)  $1,080

Question 11

If the interest rate is less than the inflation rate,a rational person will never save money.

Accepted Answer

A) True 
 B)False

Question 12

If a consumer can borrow and lend at the same interest rate,then he can exactly afford a consumption plan if the present value of his consumption equals the present value of his income.

Accepted Answer

A) True 
 B)False

Question 13

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 14

For every two boxes of strawberries that she consumes,Millicent insists on having one pitcher of cream.She does not,however,insist on consuming the same amount every week.Her utility functions is U =min{s1,2c1} min{s2,2c2},where s1 and s2 are the number of boxes of strawberries she consumes this week and next week and c1 and c2 are the number of pitchers of cream she consumes this week and next.Strawberries cost $2 a box and cream costs $1 a pitcher.She has a present value of $100 to spend on these goods in the next two weeks.The weekly interest rate is 1%.How many boxes of strawberries will she consume this week?

Accepted Answer

A)  10 
B)  20 
C)  22 
D)  14.1 
E)  6.06 
A)  10 
B)  20 
C)  22 
D)  14.1 
E)  6.06

Question 15

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 16

Patience has the utility function U(c1,c2)=c1/21 +2c1/22 where c1 is her consumption in period 1 and c1 is her consumption in period 2.She will earn 100 units of the consumption good in period 1 and 100 units of the consumption good in period 2.She can borrow or lend at an interest rate of 10%.
a.Write an equation that describes Patience's budget.
b.If Patience neither borrows nor lends,what will be her marginal rate of substitution between current and future consumption?
c.If Patience does the optimal amount of borrowing or saving,what will be the ratio of her period 2 consumption to her period 1 consumption?

Accepted Answer

a.c₁ + c₂

Question 17

Mr.O.B.Kandle has a utility function c1c2,where c1 is his consumption in period 1 and c2 is his consumption in period 2.He will have no income in period 2.If he had an income of $80,000 in period 1 and the interest rate increased from 10 to 19%,

Accepted Answer

A)  his savings would increase by 9% and his consumption in period 2 would also increase. 
B)  his savings would not change but his consumption in period 2 would increase by $3,600. 
C)  his consumption in both periods would increase. 
D)  his consumption in both periods would decrease. 
E)  his consumption in period 1 would decrease by 19% and his consumption in period 2 would also decrease. 
A)  his savings would increase by 9% and his consumption in period 2 would also increase. 
B)  his savings would not change but his consumption in period 2 would increase by $3,600. 
C)  his consumption in both periods would increase. 
D)  his consumption in both periods would decrease. 
E)  his consumption in period 1 would decrease by 19% and his consumption in period 2 would also decrease.

Question 18

Kenny Kink's utility function is u(c1,c2)=min{c1,c2},where c1 is his consumption in period 1 and c2 is his consumption in period 2.He earns $200 in period 1 and $220 in period 2.Kenny can borrow and lend at an interest rate of 10%,and there is no inflation.The number of dollars that Kenny spends on consumption in the first period must be

Accepted Answer

A)  more than 200 but less than 220. 
B)  exactly 200. 
C)  more than 220. 
D)  exactly 180. 
E)  more than 180 but less than 200. 
A)  more than 200 but less than 220. 
B)  exactly 200. 
C)  more than 220. 
D)  exactly 180. 
E)  more than 180 but less than 200.

Question 19

If apples today are perfect substitutes for bananas today,then apples today must also be perfect substitutes for bananas tomorrow.

Accepted Answer

A) True 
 B)False

Question 20

The real interest rate is the interest rate that one receives net of brokerage costs or fees imposed by financial intermediaries.

Accepted Answer

A) True 
 B)False

Exam 10:Intertemporal Choice-Part A

If the real rate of interest is 12% and the nominal rate of interest is 31%,then the rate of inflation must be about

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%:

Susan is a net borrower when the interest rate is 10% and a net saver when the interest rate is 20%.A decrease in the interest rate from 20% to 10% may make Susan worse off.

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

It would be a mistake to choose the investment that maximizes the present value of your income stream unless you planned to spend your entire wealth in the current time period.

Harvey Habit has a utility function U(c1,c2)=min{c1,c2}.If he had an income of $880 in period 1 and $1,320 in period 2 and if the interest rate were 0.20,how much would Harvey choose to spend on bread in period 1?

If the interest rate is less than the inflation rate,a rational person will never save money.

If a consumer can borrow and lend at the same interest rate,then he can exactly afford a consumption plan if the present value of his consumption equals the present value of his income.

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

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.

Mr.O.B.Kandle has a utility function c1c2,where c1 is his consumption in period 1 and c2 is his consumption in period 2.He will have no income in period 2.If he had an income of $80,000 in period 1 and the interest rate increased from 10 to 19%,

If apples today are perfect substitutes for bananas today,then apples today must also be perfect substitutes for bananas tomorrow.

The real interest rate is the interest rate that one receives net of brokerage costs or fees imposed by financial intermediaries.

Demand-Part A

Revealed Preference-Part A

Revealed Preference-Part B

Slutsky Equation-Part A

Slutsky Equation-Part B

Buying and Selling-Part A

Buying and Selling-Part B

Intertemporal Choice-Part B

Asset Markets-Part A

Asset Markets-Part B

Uncertainty-Part A

Uncertainty-Part B

Risky Assets-Part A

Risky Assets-Part B

Consumers Surplus-Part A

Consumers Surplus-Part B

Market Demand-Part A

Market Demand-Part B

Equilibrium-Part A

Equilibrium-Part B

Auctions-Part A

Auctions-Part B

Technology-Part A

Technology-Part B

Profit Maximization-Part A

Profit Maximization-Part B

Cost Minimization-Part A

Cost Minimization-Part B

Cost Curves-Part A

Cost Curves-Part B

Firm Supply-Part A

Firm Supply-Part B

Industry Supply-Part A

Industry Supply-Part B

Monopoly-Part A

Monopoly-Part B

Monopoly Behavior-Part A

Monopoly Behavior-Part B

Factor Markets-Part A

Factor Markets-Part B

Oligopoly-Part A

Oligopoly-Part B

Game Theory-Part A

Game Theory-Part B

Game Applications-Part A

Game Applications-Part B

Behavioral Economics-Part A

Exchange-Part A

Exchange-Part B

Production-Part A

Production-Part B

Welfare-Part A

Welfare-Part B

Externalities-Part A

Externalities-Part B

Information Technology-Part A

Information Technology-Part B

Public Goods-Part A

Public Goods-Part B

Asymmetric Information-Part A

Asymmetric Information-Part B

Filters

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}.If he had an income of $880 in period 1 and $1,320 in period 2 and if the interest rate were 0.20,how much would Harvey choose to spend on bread in period 1?

Mr.O.B.Kandle has a utility function c₁c₂,where c₁ is his consumption in period 1 and c₂ is his consumption in period 2.He will have no income in period 2.If he had an income of $80,000 in period 1 and the interest rate increased from 10 to 19%,