Question 1

If consumers have rational expectations and follow the permanent-income hypothesis, their current consumption will increase when:

Accepted Answer

A)  previously announced tax reductions are implemented. 
B)  they receive an anticipated raise. 
C)  they receive an unexpected inheritance. 
D)  they make the last payment on their automobile loan. 
A)  previously announced tax reductions are implemented. 
B)  they receive an anticipated raise. 
C)  they receive an unexpected inheritance. 
D)  they make the last payment on their automobile loan.

Question 2

Precautionary saving is saving for:

Accepted Answer

A)  retirement, when income falls. 
B)  unpredictable expenses. 
C)  bequests to benefit children. 
D)  repayment of debt previously incurred. 
A)  retirement, when income falls. 
B)  unpredictable expenses. 
C)  bequests to benefit children. 
D)  repayment of debt previously incurred.

Question 3

In Irving Fisher's two-period model, the income 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 4

In Irving Fisher's two-period consumption model, if Y1 = 20,000, Y2 = 15,000, and the interest rate r is 0.50 (50 percent), then the maximum possible consumption in period one is:

Accepted Answer

A)  20,000. 
B)  25,000. 
C)  30,000. 
D)  35,000. 
A)  20,000. 
B)  25,000. 
C)  30,000. 
D)  35,000.

Question 5

According to the permanent-income hypothesis, if consumers receive a one-time income bonus, then they will:

Accepted Answer

A)  save most of it in the current year. 
B)  spend most of it in the current year. 
C)  spend one half of it and save one-half of it in the current year. 
D)  not alter their consumption or saving in the current year. 
A)  save most of it in the current year. 
B)  spend most of it in the current year. 
C)  spend one half of it and save one-half of it in the current year. 
D)  not alter their consumption or saving in the current year.

Question 6

What variables, in addition to current income, are hypothesized to influence consumption in the: a. Fisher two-period model?
b. life-cycle model?
c. permanent-income hypothesis?
d. random-walk hypothesis?

Accepted Answer

a. Fisher's two-period model: future inc

Question 7

A binding borrowing constraint will ______ the potency of an announced future tax cut to influence aggregate demand but will ______ the potency of a temporary tax cut.

Accepted Answer

A)  not affect; increase 
B)  increase; not affect 
C)  decrease; increase 
D)  increase; decrease 
A)  not affect; increase 
B)  increase; not affect 
C)  decrease; increase 
D)  increase; decrease

Question 8

According to Friedman's permanent-income hypothesis, the marginal propensity to consume out of permanent income is ______ the marginal propensity to consume out of transitory income.

Accepted Answer

A)  greater than 
B)  less than 
C)  equal to 
D)  one minus 
A)  greater than 
B)  less than 
C)  equal to 
D)  one minus

Question 9

In Irving Fisher's two-period model augmented by a borrowing constraint, an example of a consumer for whom the borrowing constraint might likely be binding would be:

Accepted Answer

A)  a college student. 
B)  a college student's parent. 
C)  a college professor. 
D)  the president of a bank. 
A)  a college student. 
B)  a college student's parent. 
C)  a college professor. 
D)  the president of a bank.

Question 10

Economic data suggest that when income is expected to fall by $1, consumption falls by:

Accepted Answer

A)  $1. 
B)  $0.50. 
C)  the marginal propensity to consume. 
D)  the ratio of years until retirement to the years remaining of life 
A)  $1. 
B)  $0.50. 
C)  the marginal propensity to consume. 
D)  the ratio of years until retirement to the years remaining of life

Question 11

The life-cycle hypothesis and the permanent-income hypothesis both assume that consumers seek to:

Accepted Answer

A)  increase consumption during expansions. 
B)  minimize consumption during recessions. 
C)  increase consumption during retirement 
D)  smooth consumption over their lifetimes. 
A)  increase consumption during expansions. 
B)  minimize consumption during recessions. 
C)  increase consumption during retirement 
D)  smooth consumption over their lifetimes.

Question 12

Suppose that Congress passes a law to permanently cut taxes starting the next year. Assuming that consumers do not follow Ricardian equivalence, when would consumers adjust their consumption spending according to: a. the Keynesian consumption functi on?
b. the Fisher two-period model with binding borrowing constraints?
c. the random-walk hyp othesis (the permanent-income hyp othesis with rational expectations) with no binding borrowing constraint?

Accepted Answer

a. Consumption would increase in one yea

Question 13

Exhibit: Consumption, Income, and Wealth Over the Life Cycle   Consider the stylized pattern of lifetime income, consumption, saving, dissaving, and wealth shown in the above graph. Assume that consumption is constant over the entire lifetime, income is constant over the working lifetime, the real interest rate is zero, and there is no uncertainty about life span so that wealth equals zero at the end of life. a. If there is no populati on growth, the ratio of wealth to income will be constant for the nation. If all individuals live $T$ years and work $R$ years, the amount of wealth accumulated at the time of retirement must be enough for $T - R$ years of consumption ( $C$ per year). What is the formula for the ratio of average wealth over the whole life cycle $W$ to consumption per year, as a function of $T$ and $R$ ? That is, what is $W / C$ expressed in terms of $T$ and $R$ ?
b. If $T = 50$ and $R = 40$, what is the numerical value of $W / C$ ?

Accepted Answer

The answer of Exhibit: Consumption, Income, and Wealth Over the...

Question 14

In John Maynard Keynes's model, the most important determinant of current consumption is current income. In Irving Fisher's model, the most important determinant of current consumption is:

Accepted Answer

A)  also current income. 
B)  the interest rate. 
C)  lifetime resources. 
D)  future income. 
A)  also current income. 
B)  the interest rate. 
C)  lifetime resources. 
D)  future income.

Question 15

Suppose that the government is considering two tax cuts, one temporary and one permanent. Each cut will give each taxpayer the same amount in the first year. The permanent-income hypothesis predicts that:

Accepted Answer

A)  each tax cut will lead to the same amount of consumption in the first year. 
B)  the temporary tax cut will lead to more extra consumption in the first year. 
C)  the permanent tax cut will lead to more extra consumption in the first year. 
D)  the temporary tax cut will lead to no extra consumption at all in the first year. 
A)  each tax cut will lead to the same amount of consumption in the first year. 
B)  the temporary tax cut will lead to more extra consumption in the first year. 
C)  the permanent tax cut will lead to more extra consumption in the first year. 
D)  the temporary tax cut will lead to no extra consumption at all in the first year.

Question 16

If a consumer is in a position in which a borrowing constraint limits his or her current consumption and a one-time tax is levied on his or her current income, then the tax will:

Accepted Answer

A)  lower the consumer's future consumption. 
B)  not affect the consumer's future consumption. 
C)  increase the consumer's future consumption. 
D)  have no effect on either current or future consumption. 
A)  lower the consumer's future consumption. 
B)  not affect the consumer's future consumption. 
C)  increase the consumer's future consumption. 
D)  have no effect on either current or future consumption.

Question 17

What is consumption smoothing?

Accepted Answer

When an increase in income occ

Question 18

A consumption function based on the Fisher two-period model is consistent with the Keynesian consumption function for consumers who:

Accepted Answer

A)  would like to borrow, but cannot. 
B)  are initially borrowers when future income increases. 
C)  are initially savers when future income increases. 
D)  are initially borrowers when the interest rate increases. 
A)  would like to borrow, but cannot. 
B)  are initially borrowers when future income increases. 
C)  are initially savers when future income increases. 
D)  are initially borrowers when the interest rate increases.

Question 19

What is meant by the phrase "consumption smoothing" and why is it a key element of the life-cycle hypothesis and the permanent-income hypothesis?

Accepted Answer

Consumption smoothing refers to consumer

Question 20

According to the permanent-income hypothesis, if consumers receive a permanent increase in their salary then they will:

Accepted Answer

A)  save most of it in the current year. 
B)  spend most of it in the current year. 
C)  spend one half of it and save one-half of it in the current year. 
D)  not alter their consumption or saving in the current year. 
A)  save most of it in the current year. 
B)  spend most of it in the current year. 
C)  spend one half of it and save one-half of it in the current year. 
D)  not alter their consumption or saving in the current year.

If consumers have rational expectations and follow the permanent-income hypothesis, their current consumption will increase when:

Precautionary saving is saving for:

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

In Irving Fisher's two-period consumption model, if Y₁ = 20,000, Y₂ = 15,000, and the interest rate r is 0.50 (50 percent), then the maximum possible consumption in period one is:

According to the permanent-income hypothesis, if consumers receive a one-time income bonus, then they will:

What variables, in addition to current income, are hypothesized to influence consumption in the: a. Fisher two-period model? b. life-cycle model? c. permanent-income hypothesis? d. random-walk hypothesis?

A binding borrowing constraint will the potency of an announced future tax cut to influence aggregate demand but will the potency of a temporary tax cut.

According to Friedman's permanent-income hypothesis, the marginal propensity to consume out of permanent income is ______ the marginal propensity to consume out of transitory income.

In Irving Fisher's two-period model augmented by a borrowing constraint, an example of a consumer for whom the borrowing constraint might likely be binding would be:

Economic data suggest that when income is expected to fall by $1, consumption falls by:

The life-cycle hypothesis and the permanent-income hypothesis both assume that consumers seek to:

In John Maynard Keynes's model, the most important determinant of current consumption is current income. In Irving Fisher's model, the most important determinant of current consumption is:

Suppose that the government is considering two tax cuts, one temporary and one permanent. Each cut will give each taxpayer the same amount in the first year. The permanent-income hypothesis predicts that:

If a consumer is in a position in which a borrowing constraint limits his or her current consumption and a one-time tax is levied on his or her current income, then the tax will:

What is consumption smoothing?

A consumption function based on the Fisher two-period model is consistent with the Keynesian consumption function for consumers who:

What is meant by the phrase "consumption smoothing" and why is it a key element of the life-cycle hypothesis and the permanent-income hypothesis?

According to the permanent-income hypothesis, if consumers receive a permanent increase in their salary then they will:

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

If consumers have rational expectations and follow the permanent-income hypothesis, their current consumption will increase when:

Precautionary saving is saving for:

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

In Irving Fisher's two-period consumption model, if Y1 = 20,000, Y2 = 15,000, and the interest rate r is 0.50 (50 percent), then the maximum possible consumption in period one is:

According to the permanent-income hypothesis, if consumers receive a one-time income bonus, then they will:

What variables, in addition to current income, are hypothesized to influence consumption in the: a. Fisher two-period model? b. life-cycle model? c. permanent-income hypothesis? d. random-walk hypothesis?

A binding borrowing constraint will ______ the potency of an announced future tax cut to influence aggregate demand but will ______ the potency of a temporary tax cut.

According to Friedman's permanent-income hypothesis, the marginal propensity to consume out of permanent income is ______ the marginal propensity to consume out of transitory income.

In Irving Fisher's two-period model augmented by a borrowing constraint, an example of a consumer for whom the borrowing constraint might likely be binding would be:

Economic data suggest that when income is expected to fall by $1, consumption falls by:

The life-cycle hypothesis and the permanent-income hypothesis both assume that consumers seek to:

In John Maynard Keynes's model, the most important determinant of current consumption is current income. In Irving Fisher's model, the most important determinant of current consumption is:

Suppose that the government is considering two tax cuts, one temporary and one permanent. Each cut will give each taxpayer the same amount in the first year. The permanent-income hypothesis predicts that:

If a consumer is in a position in which a borrowing constraint limits his or her current consumption and a one-time tax is levied on his or her current income, then the tax will:

What is consumption smoothing?

A consumption function based on the Fisher two-period model is consistent with the Keynesian consumption function for consumers who:

What is meant by the phrase "consumption smoothing" and why is it a key element of the life-cycle hypothesis and the permanent-income hypothesis?

According to the permanent-income hypothesis, if consumers receive a permanent increase in their salary then they will:

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

In Irving Fisher's two-period consumption model, if Y₁ = 20,000, Y₂ = 15,000, and the interest rate r is 0.50 (50 percent), then the maximum possible consumption in period one is:

A binding borrowing constraint will the potency of an announced future tax cut to influence aggregate demand but will the potency of a temporary tax cut.