Deck 16: Consumption

Question 1

In the intertemporal budget constraint, is:

A) equal to future borrowing.
B) today's saving for the future.
C) equal to zero.
D) the rate of return on financial wealth.
E) future savings.

Answer 1

today's saving for the future.

Question 2

Which of the following is NOT household consumption?

A) food
B) banking services
C) roads
D) vacations
E) health care

Answer 2

roads

Question 3

The model used to explain consumption is called the ________ consumption model.

A) Stone-Geary
B) Keynesian
C) Solow
D) neoclassical
E) classical

Answer 3

neoclassical

Question 4

Refer to the following figure when answering the following questions.
Figure 16.1: Consumption Function
Consider the utility functions in Figure 16.1. Curve b exhibits:

A) risk-taking behavior.
B) constant marginal utility.
C) diminishing marginal utility.
D) consumption smoothing.
E) None of these answers is correct.

Question 5

Consider two time periods: t and k. Which of the following would represent the "future's" budget constraint?

A)
B)
C)
D)
E)

Question 6

If consumption exhibits diminishing marginal utility, then:

A) utility can never be equal to zero.
B) the utility function is downward sloping.
C) additional units of consumption after some threshold make one worse off.
D) more consumption leads to declining utility.
E) additional units of consumption raise utility by smaller and smaller amounts.

Question 7

The intertemporal budget constraint is written as:

A) .
B) .
C) .
D) .
E) .

Question 8

Refer to the following figure when answering the following questions.
Figure 16.1: Consumption Function
Consider the utility functions in Figure 16.1. Curve b exhibits:

A) risk-taking behavior.
B) constant marginal utility.
C) increasing marginal utility.
D) consumption smoothing.
E) diminishing marginal utility.

Question 9

Human wealth is given by:

A) Education.
B) the present value of labor income.
C) Health.
D) human capital accumulation.
E) government transfers.

Question 10

Who was one of the originators of the neoclassical consumption model?

A) Robert Barro
B) David Ricardo
C) Irving Fisher
D) Robert Solow
E) Paul Samuelson

Question 11

The intertemporal budget constraint basically states that:

A) the present value of consumption must equal lifetime income only.
B) total consumption equals total income.
C) the present value of consumption must equal lifetime wealth.
D) there is no future consumption because there is no future income.
E) the present value of consumption is paid for by today's income only.

Question 12

Which of the following represents human wealth?

A) the present value of labor income
B) the level of educational attainment
C) skills gained over time
D) the total stock of assets owned
E) the value of savings

Question 13

In the simple ________ model of consumption, we consider a(n) ________ period lifetime.

A) constant rate of risk aversion; T
B) Marxian; one
C) Stone-Geary; infinite
D) Keynesian; one
E) neoclassical; two

Question 14

One of the implications of the intertemporal budget constraint is that:

A) current consumption does not have to equal current income.
B) there can be income transfers between today and the future.
C) lifetime consumption equals total wealth.
D) All of these answers are correct.
E) None of these answers is correct.

Question 15

The utility function is constructed in such a way that consumption exhibits:

A) diminishing marginal utility.
B) total satisfaction.
C) a single period level of utility.
D) total lifetime income.
E) diminishing utility.

Question 16

Refer to the following figure when answering the following questions.
Figure 16.1: Consumption Function
Consider the utility functions in Figure 16.1. Which of the following exhibits diminishing marginal utility?

A) a
B) e
C) d
D) b
E) c

Question 17

Household consumption accounts for about ________ of U.S. GDP.

A) two-thirds
B) one-half
C) one-fourth
D) one-third
E) five-sixths

Question 18

In the intertemporal budget constraint, wealth is equal to:

A) financial wealth.
B) savings held in stocks and bonds.
C) lifetime income.
D) the overall stock of assets held by future generations.
E) financial plus "human" wealth.

Question 19

Consider two time periods: t and k. Which of the following would represent "today's" budget constraint?

A)
B)
C)
D)
E)

Question 20

The consumer chooses his or her ________ to maximize his or her ________.

A) consumption; income
B) income; consumption
C) wealth; profits
D) consumption; utility
E) interest rate; wealth

Question 21

In the utility functions in Figure 16.1, curve b exhibits:

A) diminishing marginal utility.
B) economies of scale.
C) risk seeking.
D) satiation.
E) unrealistic behavior.

Question 22

With logarithmic utility, the Euler equation is given by:

A) .
B) .
C) .
D) .
E) .

Question 23

Which of the following represents the consumer's lifetime utility?

A)
B)
C)
D)
E)

Question 24

If you have maximized your lifetime utility, you get which of the following?

A)
B)
C)
D)
E)

Question 25

If moving an extra unit of future consumption to today's consumption improves your lifetime utility, you are not:

A) saving enough.
B) spending all your future income.
C) maximizing your lifetime utility.
D) earning income today.
E) discounting the future.

Question 26

If the Euler equation did not hold, then:

A) the real interest rate would be zero.
B) a consumer would not spend all of his or her lifetime wealth.
C) a consumer could move consumption from one period to another and increase lifetime utility.
D) the consumer has spent more than his or her lifetime wealth.
E) None of these answers is correct.

Question 27

If moving an extra unit of today's consumption to future consumption improves your lifetime utility, you are not:

A) equalizing consumption over time.
B) satisfying the Euler equation.
C) satisfying your intertemporal budget constraint.
D) putting enough into increasing your family wealth.
E) paying enough taxes to finance Social Security.

Question 28

The household problem is to solve:

A) .
B) .
C) .
D) .
E)

Question 29

The problem the household must solve is:

A) choosing period consumption to satisfy the concurrent budget constraint.
B) choosing consumption to ensure some income is left over for future generations.
C) satisfying the intertemporal budget constraint by finding a good source of income.
D) making sure the household is saving at least 10 percent of its income.
E) choosing lifetime consumption that satisfies the intertemporal budget constraint.

Question 30

In the intertemporal budget constraint, is:

A) lifetime income.
B) total lifetime wealth.
C) today's wages.
D) a household stock of bank savings.
E) future wealth.

Question 31

In the text, is ________ and
Is ________.

A) the discounted marginal utility of today's consumption; the marginal utility of future consumption
B) today's total welfare; the future's total welfare
C) total utility of today's consumption; the discounted total utility of today's consumption
D) the marginal utility of today's consumption; the discounted marginal utility of future consumption
E) the marginal utility of today's consumption; the marginal utility of future consumption

Question 32

The in the lifetime utility function represents:

A) expected future wealth.
B) the risk parameter.
C) any number greater than one.
D) the amount of future discount.
E) life expectancy.

Question 33

The equation is called:

A) the Euler equation.
B) the Fisher equation.
C) the quantity equation.
D) Ricardian equivalence.
E) transition dynamics.

Question 34

The in the lifetime utility function represents:

A) consumption.
B) the level of uncertainty.
C) any number greater than one.
D) consumer patience.
E) life expectancy.

Question 35

In the text, is given by:

A) .
B) .
C) .
D) .
E) .

Question 36

Which of the following does the Euler equation state?

A) "The total supply of money is equal to nominal GDP divided by velocity."
B) "The real interest rate is the nominal interest rate minus inflation."
C) "A consumer must be indifferent between consuming one more unit today or in the future."
D) "The present value of government's spending must equal the present value of receipts."
E) "Consumption is a function of permanent income."

Question 37

The parameter in the consumer's lifetime utility function represents the ________ and is ________ if utility is worth more today than in the future.

A) weight he or she puts on the future relative to today; less than one
B) value of future consumption; equal to one or equal to zero
C) expected present value of lifetime wealth; unknown today
D) rate of return to savings; equal to long-term bond yields
E) annual income growth; equal to the average GDP growth rate

Question 38

Your lifetime utility is a function of:

A) today's consumption only.
B) the present value of future consumption only.
C) today's consumption and the present value of future consumption.
D) the amount of wealth in the utility function.
E) your lifetime income.

Question 39

In the special case where , and with logarithmic utility, the Euler equation is given by:

A) .
B) .
C) .
D) .
E) .

Question 40

If in your lifetime utility function, then:

A) your utility function displays increasing marginal returns.
B) you are risk averse.
C) you prefer utilities received today relative to the future.
D) you prefer utilities received in the future relative to today.
E) Not enough information is given.

Question 41

If , then:

A) consumption growth is negative.
B) you began to do precautionary saving.
C) permanent income is constant.
D) you save more.
E) wealth declines.

Question 42

Suppose , and
) Assuming logarithmic utility, what is consumption today?

A) $75,000.00
B) $35,714.29
C) $39,375.00
D) $37,500.00
E) Not enough information is given.

Question 43

Using the neoclassical model of consumption, an implication of the permanent-income hypothesis is ________ because ________.

A) consumption smoothing; of diminishing marginal utility
B) that permanent income follows a random walk; of aggregate demand shocks
C) that wealth is constant; real interest rates are, more or less, constant
D) a low discount factor; of the borrowing constraint
E) no borrowing; income in the future is higher

Question 44

If you live T periods, , and
, with logarithmic utility, the marginal propensity of income is approximately equal to:

A) 1/T.
B) T.
C) 1/2.
D) .
E) .

Question 45

In Figure 16.2, point c is equal to the ________ and implies ________.

A) utility of the average of and ; consumption smoothing
B) utility associated with consuming ; risk neutrality
C) utility of consumption; Ricardian equivalence
D) average utility of and ; a borrowing constraint
E) utility of the average of and ; a low discount factor

Question 46

To analyze Ricardian equivalence using the neoclassical consumption model, we must:

A) remove taxes from the present value of wealth.
B) include inflation in the intertemporal budget constraint.
C) treat the discount factor as greater than one.
D) use nominal, rather than real, interest rates.
E) assume that marginal utility is constant.

Question 47

If $\beta$ =1 and R=0, and if you prefer in each period 1 and 2 rather than u(c₁) + u(c₂), then you are:

A) discounting the future.
B) risk neutral.
C) consumption smoothing.
D) satiating.
E) irrational.

Question 48

With logarithmic utility, the Euler equation is given by:

A) .
B) .
C) .
D) .
E) .

Question 49

As a college student, you are likely to be impatient; therefore, your consumption growth rate
Would be:

A) relatively slow.
B) relatively fast.
C) solely dependent on the amount of future income.
D) inversely related to the interest rate.
E) Not enough information is given.

Question 50

According to the consumption function in Figure 16.2:

A) people's lifetime utilities are equal to .
B) people prefer to consume the average over their lifetimes rather than and .
C) the utility associated with consuming the average over both periods is less than the average of and .
D) .
E) the marginal propensity to consume is greater than one.

Question 51

Refer to the following figure when answering the following questions.
Figure 16.2: Consumption Function
In Figure 16.2 above, point e is equal to:

A) the average of and .
B) the utility associated with consuming .
C) total consumption.
D) the average utility of and .
E) the utility of the average of and .

Question 52

If , then:

A) and consumption shrinks.
B) and consumption grows.
C) and you decide to save.
D) , because you make higher income in the future.
E) , because you have drawn your savings down to zero.

Question 53

If the interest rate rises and people consume less today, this is called:

A) permanent income.
B) the precautionary effect.
C) the income effect.
D) the wealth effect.
E) the intertemporal marginal rate of substitution.

Question 54

If you see low interest rates, you(r) ________ and consumption growth ________.

A) save less; slows down
B) expect high rates of inflation; speeds up
C) discount the future more; is constant
D) save more; increases
E) permanent income is constant; is zero

Question 55

From the Euler equation, if , then ________ and ________.

A)
B)
C)
D)
E)

Question 56

Suppose , and
) Assuming logarithmic utility, what is consumption in the future?

A) $75,000.00
B) $35,714.29
C) $39,375.00
D) $37,500.00
E) Not enough information is given.

Question 57

An implication of Figure 16.2 is that consumers:

A) smooth consumption.
B) are risk takers.
C) save all their income in period 1.
D) are risk neutral.
E) always consume .

Question 58

Consider consumption in two periods, c₁ and c₂ Consumption smoothing implies that:

A) if taxes fall today, they will rise tomorrow.
B) people would consume c₁ = c₂
C) people would rather consume the average of c₁ and c₂ .
D) transitory income is zero.
E) people always know their future incomes and adjust consumption accordingly.

Question 59

The left-hand side of the Euler equation, , represents the:

A) growth rate of income.
B) total lifetime consumption, in dollars.
C) lifetime utility function.
D) discount factor.
E) growth rate of consumption.

Question 60

A higher interest rate ________ and ________.

A) reduces the present value of future income; reduces today's consumption
B) increases the present value of future income; increases today's consumption
C) increases the discount rate; increases today's consumption
D) is an incentive to borrow more today; reduces future consumption
E) reduces inflation; consumers spend more today

Question 61

Which of the following summarize(s) the findings in the consumption expenditure literature?
i. The permanent income hypothesis provides a useful description of household
Consumption behavior.
ii. Households do not engage in precautionary saving.
iii. The marginal propensity to consume out of temporary income is high.

A) i
B) i and iii
C) ii and iii
D) iii
E) ii

Question 62

If we lower taxes today but raise them in the future, and if = 1:

A) households' wealth rises because they save less.
B) households will increase today's consumption.
C) present wealth remains unchanged and consumption does not change.
D) the government can rely on households to spend more today.
E) saving today will fall and lifetime consumption rises.

Question 63

Refer to the following figure when answering the following questions.
Figure 16.4: Personal Saving Rate: 1990-2010

-Consider Figure 16.4. A possible cause for the change in the saving rate after about 2007 is:

A) precautionary saving.
B) consumption smoothing.
C) a falling discount factor.
D) rising marginal utility of consumption.
E) the aging of the baby boomers.

Question 64

________ is when households save to hedge against uncertainty.

A) Precautionary saving
B) A bond purchase strategy
C) Consumption smoothing
D) Utility maximization
E) Credit constraint

Question 65

Figure 16.3: Daily Returns to Jim-Bob's Spark Plugs, LLC
According to one study, consumption expenditure ________ when an individual retires.

A) is unchanged
B) rises about 2 percent
C) falls about 44 percent
D) falls about 17 percent
E) rises about 13 percent

Question 66

The decline in the U.S. personal savings rate between 1980 and 2005 can be explained by:

A) large gains in the housing and stock markets.
B) increased company pension funds.
C) extremely low bank saving interest rates.
D) rising discount factors.
E) the aging of the U.S. population.

Question 67

Evidence of irrational economic behavior can be found in:

A) how employees enroll in 401(k) retirement plans.
B) the rapid diversification of retirement accounts of Enron employees.
C) participation rates in health insurance.
D) high unemployment rates in people under the age of 25.
E) the decline in personal savings rates.

Question 68

Because people cannot perfectly foresee income changes over their lifetimes, consumption should:

A) be smooth.
B) be predictable.
C) be constant throughout one's lifetime.
D) follow a random walk.
E) rise throughout one's lifetime.

Question 69

If the government lowers taxes to stimulate the economy but then raises taxes in the future, according to the neoclassical consumption model, ________ because of ________.

A) consumption will rise today, but fall in the future; the lack of consumption smoothing
B) savings in each period rises; precautionary saving
C) transitory income rises; falling discount factors
D) tax revenues will rise; the Laffer curve
E) the present value of wealth remains unchanged, and consumption today does not change; Ricardian equivalence

Question 70

Behavioral economics blends economics with:

A) psychology.
B) marketing.
C) physics.
D) anthropology.
E) statistics.

Question 71

Figure 16.3: Daily Returns to Jim-Bob's Spark Plugs, LLC
Figure 16.3 shows the daily stock returns to Jim-Bob's Sparkplugs, LLC. From this figure you conclude that ________ because ________.

A) this market is efficient; the data seems to follow a random walk
B) Jim-Bob does not know how to operate his business; returns can be negative
C) Jim-Bob can beat the market; average returns are greater than zero
D) stock prices are predictable; fluctuations are consistent
E) there is some insider trading occurring; mean returns are zero

Question 72

Figure 16.3: Daily Returns to Jim-Bob's Spark Plugs, LLC
According to the neoclassical model, individuals ________ over their lifetimes; however, one study showed that ________ at retirement. This puzzle was solved when two economists tested the neoclassical model using ________.

A) hold consumption constant; consumption rises sharply; purchases of RVs
B) slow their consumption; consumption rises; data from Brazil
C) consumption smooth; consumption falls 17 percent; food consumption
D) do not maximize lifetime utilities; they have zero income; dividend receipts
E) rely on transitory income; the discount factor is one; cost minimization

Question 73

Refer to the following figure when answering the following questions.
Figure 16.5: U.S. Household Net Worth
Based on Figure 16.5, personal savings generally ________ over the period. However, personal savings ________ between roughly 2007 and 2009, which was likely due to ________.

A) fell; rose; precautionary savings
B) fell; fell; negative interest rates
C) rose; rose; an increase in interest rates
D) rose; rose; the wealth effect
E) fell; rose; higher gas prices

Question 74

Precautionary savings lead households to act as if they are ________ when they are not.

A) going to last forever
B) facing declines in the stock market
C) staring death in the eye
D) credit constrained
E) unemployed

Question 75

Between 1970 and 2008, household consumption ________ of GDP. Over this period, ________ to about ________ percent of GDP.

A) grew from 63 percent to 70 percent; personal savings rose; 7
B) remained at about two-thirds; personal savings fell; -3
C) shrank as a percentage; personal savings rose; 12
D) grew from 63 percent to 70 percent; household debt rose; 100
E) fell from 66 percent to 63 percent; household debt rose; 70

Question 76

If an individual has no access to credit markets:

A) his or her marginal propensity to consume is one.
B) he or she saves much less.
C) he or she can consumption smooth.
D) his or her marginal propensity to consume is equal to 1/T if he or she lives T periods.
E) his or her future consumption is equal to zero.

Question 77

Individuals who have restricted access to credit markets:

A) cannot maximize their lifetime utilities.
B) save less.
C) must rely on transitory income.
D) are subject to borrowing constraints.
E) can engage in perfect consumption smoothing.

Question 78

One of the findings of studies in behavioral economics is that:

A) business cycles have no impact on consumption patterns.
B) Ricardian equivalence is more prevalent than previously thought.
C) transitory income has no effect on consumption.
D) consumption is more sensitive to current income changes than suggested by the permanent-income hypothesis.
E) people tend to put greater emphasis on future income than on current income.

Question 79

Refer to the following figure when answering the following questions.
Figure 16.4: Personal Saving Rate: 1990-2010

-Consider Figure 16.4. A possible cause for the fall in the saving rate between 1990 and 2005 is:

A) precautionary saving.
B) consumption smoothing.
C) the changing composition of households' savings portfolios.
D) increasing competition among commercial banks.
E) less access to credit markets.

Question 80

Refer to the following figure when answering the following questions.
Figure 16.5: U.S. Household Net Worth
Based on Figure 16.5, consumption ________ between roughly 2004 and 2007, which was likely due
To ________.

A) rose; a rise in precautionary savings
B) fell; worries about inflation
C) fell; a decline in interest rates
D) rose; the rise in wealth
E) was unchanged; consumption smoothing