Question 1

According to Franco Modigliani's life-cycle hypothesis, the principal determinant(s) of consumption is (are):

Accepted Answer

A)  permanent income. 
B)  income and wealth. 
C)  transitory income. 
D)  wealth. 
A)  permanent income. 
B)  income and wealth. 
C)  transitory income. 
D)  wealth.

Question 2

Simon Kuznets found that, over long periods of time in the United States, as income rose, the average propensity to consume:

Accepted Answer

A)  rose. 
B)  fell. 
C)  remained constant. 
D)  rose and then fell. 
A)  rose. 
B)  fell. 
C)  remained constant. 
D)  rose and then fell.

Question 3

The behavior of consumers spreading increases in income earned in one period into increases in consumption over several periods is known as:

Accepted Answer

A)  random-walk consumption. 
B)  transitory consumption. 
C)  consumption smoothing. 
D)  the income effect. 
A)  random-walk consumption. 
B)  transitory consumption. 
C)  consumption smoothing. 
D)  the income effect.

Question 4

Ken Downing behaves according to Irving Fisher's two-period model. Consumption in both periods is a normal good for Ken. Ken is initially a saver in period one. Ken loses his job in period one. His first-period income becomes his unemployment benefits, which are much lower than his period-one income had been. His expected income in period two is unchanged. Illustrate graphically how this job loss affects Ken's consumption in periods one and two.

Accepted Answer

@#IMG-DLM& Consumption in both

Question 5

Use the following to answer questions :
Exhibit: Budget Constraint  
-(Exhibit: Budget Constraint) Based on the graph, if Y1 and Y2 represent income in period one and period two, respectively, at which point along the budget constraint would a consumer be a borrower in period one?

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  D 
A)  A 
B)  B 
C)  C 
D)  D

Question 6

According to the life-cycle model, the average propensity to consume does not fall as income increases in the long run because:

Accepted Answer

A)  wealth and income grow together. 
B)  as income increases wealth decreases. 
C)  saving is constant over the life cycle. 
D)  wealth is constant over the life cycle. 
A)  wealth and income grow together. 
B)  as income increases wealth decreases. 
C)  saving is constant over the life cycle. 
D)  wealth is constant over the life cycle.

Question 7

In Irving Fisher's two-period consumption model, if Y1 = 15,000, Y2 = 20,000, the interest rate r is 0.50 (50 percent), and there is a constraint on borrowing that is binding, then C2 equals:

Accepted Answer

A)  20,000. 
B)  22,500. 
C)  35,000. 
D)  42,500. 
A)  20,000. 
B)  22,500. 
C)  35,000. 
D)  42,500.

Question 8

Transitory income is:

Accepted Answer

A)  income that persists. 
B)  average income. 
C)  random deviations from average income. 
D)  current income. 
A)  income that persists. 
B)  average income. 
C)  random deviations from average income. 
D)  current income.

Question 9

According to Friedman's permanent-income hypothesis, if the marginal propensity to consume out of permanent income equals 0.9 and current income equals $55,000 (of which $5,000 is transitory income), then consumption should equal:

Accepted Answer

A)  $5,000. 
B)  $45,000. 
C)  $49,500. 
D)  $55,000. 
A)  $5,000. 
B)  $45,000. 
C)  $49,500. 
D)  $55,000.

Question 10

Assume you are a 25-year old who expects to work for 40 years and then enjoy 30 years of retirement. (Assume a discount rate of 3 percent.) If you behave according to the life-cycle/permanent income hypothesis, how would your current consumption change if: a. You win $\$ 1,000,000$ in the lottery this year.
b. You expect to get a $\$ 1,000,000$ "signing bonus" when you get a job next year.

Accepted Answer

Under the first scenario the present val

Question 11

Assume that the typical household behaves according to Irving Fisher's two-period model, that consumption in both periods is a normal good and that households are initially savers. Illustrate graphically how a tax cut in period one affects consumption in both periods. Assume that the average consumer does not believe that he or she or anyone in the family will ever have to pay higher taxes in the future to offset the current cuts.

Accepted Answer

@#IMG-DLM& Consumption in both

Question 12

Consumers with time-inconsistent preferences:

Accepted Answer

A)  base consumption decisions on transitory rather than permanent income. 
B)  seek to consume more in retirement than during their working years. 
C)  may alter decisions simply because time passes. 
D)  face borrowing constraints that prevent rational behavior. 
A)  base consumption decisions on transitory rather than permanent income. 
B)  seek to consume more in retirement than during their working years. 
C)  may alter decisions simply because time passes. 
D)  face borrowing constraints that prevent rational behavior.

Question 13

How do binding borrowing constraints change the determination of current consumption in the Fisher two-period model and in the random-walk hypothesis (permanent-income hypothesis with rational expectations)?

Accepted Answer

In the Fisher two-period model, binding

Question 14

Milton Friedman viewed current income as the sum of permanent income and:

Accepted Answer

A)  bonus income. 
B)  transitory income. 
C)  temporary income. 
D)  surprise income. 
A)  bonus income. 
B)  transitory income. 
C)  temporary income. 
D)  surprise income.

Question 15

The consumer's budget constraint reflects the fact that because interest is earned on savings:

Accepted Answer

A)  future income is worth less than current income. 
B)  future income is worth more than current income. 
C)  future consumption costs more than current consumption. 
D)  future consumption is worth more than future income. 
A)  future income is worth less than current income. 
B)  future income is worth more than current income. 
C)  future consumption costs more than current consumption. 
D)  future consumption is worth more than future income.

Question 16

A normal good is a good that:

Accepted Answer

A)  provides pleasure. 
B)  would generally be owned by an average household. 
C)  has a value greater than zero. 
D)  is desired in larger quantities by a consumer when his or her income rises. 
A)  provides pleasure. 
B)  would generally be owned by an average household. 
C)  has a value greater than zero. 
D)  is desired in larger quantities by a consumer when his or her income rises.

Question 17

Recent research by Laibson and other economists recognizes the importance of incorporating ______ effects into the study of consumer behavior.

Accepted Answer

A)  technological 
B)  meteorological 
C)  environmental 
D)  psychological 
A)  technological 
B)  meteorological 
C)  environmental 
D)  psychological

Question 18

In Irving Fisher's two-period model, the substitution effect of an increase in the interest rate in the first period, for a saver, is the:

Accepted Answer

A)  decrease in the relative price of second-period consumption. 
B)  additional income earned on first-period saving. 
C)  decrease in the relative price of first-period consumption. 
D)  additional income earned on second-period saving. 
A)  decrease in the relative price of second-period consumption. 
B)  additional income earned on first-period saving. 
C)  decrease in the relative price of first-period consumption. 
D)  additional income earned on second-period saving.

Question 19

According to Keynes, what is the relationship between average propensity to consume and income? What was his reasoning?

Accepted Answer

Keynes posited that the ratio of consump

Question 20

According to the life-cycle model, when wealth is constant in the short run, the average propensity to consume ______ as income increases.

Accepted Answer

A)  increases 
B)  decreases 
C)  remains constant 
D)  can either increase or decrease 
A)  increases 
B)  decreases 
C)  remains constant 
D)  can either increase or decrease

According to Franco Modigliani's life-cycle hypothesis, the principal determinant(s) of consumption is (are):

Simon Kuznets found that, over long periods of time in the United States, as income rose, the average propensity to consume:

The behavior of consumers spreading increases in income earned in one period into increases in consumption over several periods is known as:

Use the following to answer questions : Exhibit: Budget Constraint -(Exhibit: Budget Constraint) Based on the graph, if Y₁ and Y₂ represent income in period one and period two, respectively, at which point along the budget constraint would a consumer be a borrower in period one?

According to the life-cycle model, the average propensity to consume does not fall as income increases in the long run because:

In Irving Fisher's two-period consumption model, if Y₁ = 15,000, Y₂ = 20,000, the interest rate r is 0.50 (50 percent), and there is a constraint on borrowing that is binding, then C₂ equals:

Transitory income is:

According to Friedman's permanent-income hypothesis, if the marginal propensity to consume out of permanent income equals 0.9 and current income equals $55,000 (of which $5,000 is transitory income), then consumption should equal:

Consumers with time-inconsistent preferences:

How do binding borrowing constraints change the determination of current consumption in the Fisher two-period model and in the random-walk hypothesis (permanent-income hypothesis with rational expectations)?

Milton Friedman viewed current income as the sum of permanent income and:

The consumer's budget constraint reflects the fact that because interest is earned on savings:

A normal good is a good that:

Recent research by Laibson and other economists recognizes the importance of incorporating ______ effects into the study of consumer behavior.

In Irving Fisher's two-period model, the substitution effect of an increase in the interest rate in the first period, for a saver, is the:

According to Keynes, what is the relationship between average propensity to consume and income? What was his reasoning?

According to the life-cycle model, when wealth is constant in the short run, the average propensity to consume ______ as income increases.

The Science of Macroeconomics

The Data of Macroeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

The Open Economy

Unemployment and the Labor Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Is-Lm Model

Aggregate Demand Ii: Applying the Is-Lm Model

The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

The Theory of Investment

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

Filters

Exam 16: Understanding Consumer Behavior

According to Franco Modigliani's life-cycle hypothesis, the principal determinant(s) of consumption is (are):

Simon Kuznets found that, over long periods of time in the United States, as income rose, the average propensity to consume:

The behavior of consumers spreading increases in income earned in one period into increases in consumption over several periods is known as:

Use the following to answer questions : Exhibit: Budget Constraint -(Exhibit: Budget Constraint) Based on the graph, if Y1 and Y2 represent income in period one and period two, respectively, at which point along the budget constraint would a consumer be a borrower in period one?

According to the life-cycle model, the average propensity to consume does not fall as income increases in the long run because:

In Irving Fisher's two-period consumption model, if Y1 = 15,000, Y2 = 20,000, the interest rate r is 0.50 (50 percent), and there is a constraint on borrowing that is binding, then C2 equals:

Transitory income is:

According to Friedman's permanent-income hypothesis, if the marginal propensity to consume out of permanent income equals 0.9 and current income equals $55,000 (of which $5,000 is transitory income), then consumption should equal:

Consumers with time-inconsistent preferences:

How do binding borrowing constraints change the determination of current consumption in the Fisher two-period model and in the random-walk hypothesis (permanent-income hypothesis with rational expectations)?

Milton Friedman viewed current income as the sum of permanent income and:

The consumer's budget constraint reflects the fact that because interest is earned on savings:

A normal good is a good that:

Recent research by Laibson and other economists recognizes the importance of incorporating ______ effects into the study of consumer behavior.

In Irving Fisher's two-period model, the substitution effect of an increase in the interest rate in the first period, for a saver, is the:

According to Keynes, what is the relationship between average propensity to consume and income? What was his reasoning?

According to the life-cycle model, when wealth is constant in the short run, the average propensity to consume ______ as income increases.

The Science of Macroeconomics

The Data of Macroeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

The Open Economy

Unemployment and the Labor Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Is-Lm Model

Aggregate Demand Ii: Applying the Is-Lm Model

The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

The Theory of Investment

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

Filters

Use the following to answer questions : Exhibit: Budget Constraint -(Exhibit: Budget Constraint) Based on the graph, if Y₁ and Y₂ represent income in period one and period two, respectively, at which point along the budget constraint would a consumer be a borrower in period one?

In Irving Fisher's two-period consumption model, if Y₁ = 15,000, Y₂ = 20,000, the interest rate r is 0.50 (50 percent), and there is a constraint on borrowing that is binding, then C₂ equals: