Question 1

Robert E.Hall's theory of consumption behavior is called

Accepted Answer

A) the absolute-income hypothesis 
B) the permanent-income theory 
C) the random-walk theory 
D) the buffer-stock theory 
E) the life-cycle theory

Question 2

Hall's random walk-theory of consumption states that consumption tomorrow should equal

Accepted Answer

A) income tomorrow minus income today plus some random error 
B) income today minus consumption today plus some random error 
C) consumption today plus some random error 
D) permanent income plus some random error 
E) income tomorrow plus some random error

Question 3

If uncertainty about future income and future needs is incorporated into the life-cycle theory of consumption, then

Accepted Answer

A) buffer-stock saving can no longer be explained 
B) the fact that consumption is interest sensitive can be explained 
C) the fact that people rarely use up their lifetime saving can be explained 
D) the fact that saving is interest sensitive can be explained 
E) it is significantly different from the permanent-income theory

Question 4

If we compare the life-cycle theory of consumption with the permanent-income theory we can conclude that they both

Accepted Answer

A) pay careful attention to microeconomic foundations 
B) agree that temporary tax cuts can be used to stimulate the economy 
C) have similar theoretical bases but disagree widely in their policy implications 
D) explain why large changes in current income cause large changes in current consumption 
E) none of the above

Question 5

A temporary tax change will significantly affect current consumption

Accepted Answer

A) but only if it does not come as a surprise 
B) if liquidity constraints exist 
C) but only for the elderly 
D) as long as it does not lead to a budget deficit 
E) none of the above

Question 6

The life-cycle theory of consumption can be summarized as follows:

Accepted Answer

A) retired people need less so they can save more than working people 
B) people want instant gratification and seldom worry about the future 
C) people always tend to consume almost all of their current income 
D) people plan their consumption and saving patterns to optimize the lifetime benefit from their disposable income 
E) people adjust their current consumption constantly to keep a stable saving pattern over their lifetime

Question 7

According to the simplified life-cycle theory of consumption, a retired person with zero income from labor would

Accepted Answer

A) only consume the interest on accumulated wealth 
B) consume a fraction of accumulated wealth based upon her/his life expectancy 
C) have to decrease consumption sharply in order not to run out of funds too soon 
D) expect to be financially supported by her/his children 
E) consume more than during her/his working years since she/he does not expect to live much longer

Question 8

The random-walk theory of consumption asserts that changes in consumption arise from unexpected changes in income.This approach

Accepted Answer

A) clearly contradicts Modigliani's theory 
B) clearly contradicts Friedman's theory 
C) contradicts Modigliani's theory but supports Friedman's theory 
D) supports Modigliani's theory but contradicts Friedman's theory 
E) supports Modigliani's and Friedman's theories

Question 9

There is empirical evidence for the fact that

Accepted Answer

A) an increase in interest rates significantly reduces the level of consumption of non-durable goods 
B) an increase in wealth has no effect on the level of consumption 
C) the effects of interest rate changes on saving are small and hard to determine 
D) an increase in interest rates significantly increases the level of saving 
E) none of the above

Question 10

According to the permanent-income theory, if individuals A and B have the same average annual income but A's income fluctuates greatly from year to year while B receives an almost even flow of income each year, then

Accepted Answer

A) A will spend less than B out of permanent income 
B) B will spend less than A out of permanent income 
C) A will weigh current income less heavily in making consumption decisions than B 
D) B will weigh current income less heavily in making consumption decisions than A 
E) A's consumption will always be less than B's

Question 11

The sensitivity of current consumption to changes in current income can be explained by

Accepted Answer

A) myopia 
B) the absence of liquidity constraints 
C) the fact that consumers have the opportunity to borrow 
D) the fact that consumers always realize when a permanent change in income has occurred 
E) none of the above

Question 12

According to the permanent-income theory

Accepted Answer

A) increases in current income lead to proportionate increases in consumption and saving 
B) a rise in income affects consumption only after a delay of several years 
C) a person's consumption in any given year will be strongly affected by interest rate changes 
D) a person's consumption in any year will always be closely tied to his/her highest previous level of consumption 
E) none of the above

Question 13

When the aggregate consumption function is defined as C = C? + cYD, then

Accepted Answer

A) the mpc increases with higher levels of disposable income 
B) the mpc is constant at all levels of disposable income 
C) the apc is constant at all levels of disposable income 
D) the apc increases with higher levels of disposable income 
E) the expenditure multiplier is less than one

Question 14

Any policy designed to increase business saving will most likely

Accepted Answer

A) not affect national saving since personal saving will decline proportionally 
B) not affect national saving since the resulting budget deficit will reduce government saving 
C) increase national saving since personal saving will decrease by less than the increase in business saving 
D) reduce national saving since personal saving will decrease by more than the increase in business saving 
E) reduce national saving due to the decline in personal and government saving

Question 15

Buffer-stock saving

Accepted Answer

A) is consistent with the life-cycle hypothesis if uncertainty about future needs is included 
B) disproves the life-cycle hypothesis 
C) is the result of a permanent increase in income that is not immediately consumed 
D) explains the wealth effect 
E) none of the above

Question 16

If you are age 20, have no accumulated wealth, and have an expected average annual income of $36,000, how much should you consume each year if you want to retire at age 65 and expect to live until age 80? You desire to leave no estate and to consume an equal amount in each of the next 60 years.

Accepted Answer

A) $36,000 
B) $31,000 
C) $27,000 
D) $22,000 
E) $20,000

Question 17

The theory of consumption of durable goods

Accepted Answer

A) is basically a theory of investment applied to households 
B) states that durable goods purchases are very insensitive to interest rate changes 
C) can be explained very well by the life-cycle theory, since people spread their durable goods purchases equally over their lifetimes 
D) suggests that expenditures on durable goods do not increase utility as much as expenditures on other consumption goods 
E) none of the above

Question 18

The life-cycle theory of consumption was first advanced by

Accepted Answer

A) James Duesenberry 
B) Milton Friedman 
C) Robert Hall 
D) John Maynard Keynes 
E) Franco Modigliani

Question 19

When examining the impact of changes in the interest rate on saving, which of the following is true?

Accepted Answer

A) higher interest rates may make saving more attractive 
B) higher interest rates allow individuals to save less each year to reach their retirement saving goal 
C) empirical evidence does not suggest that interest rate changes significantly affect saving 
D) all of the above 
E) none of the above

Question 20

Assume you unexpectedly inherit $20,000.Which of the following fits the life-cycle or permanent-income theory of consumption?

Accepted Answer

A) you buy yourself some blue chip stocks 
B) you pay back part of your student loan 
C) you spend $600 on a new laptop computer and use the rest to buy government bonds 
D) you deposit $1,000 in your checking account and $19,000 in your savings account 
E) all of the above

Exam 14: Consumption and saving