Question 1

What is the impact on current consumption of a temporary tax cut according to:
a.the Keynesian consumption function?
b.the permanent-income hypothesis?

Accepted Answer

The answer of What is the impact on current consumption...

Question 2

The success of the "Save More Tomorrow" program assumes that consumers:

Accepted Answer

A) smooth consumption over their life cycles. 
B) save a constant fraction of their permanent incomes. 
C) require help controlling their desires for instant gratification. 
D) save only their transitory incomes.

Question 3

How do changes in wealth shift the consumption function in the long run?

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Question 4

Exhibit: Rental Price of Capital  Based on the graph, if the capital market is initially in equilibrium at A with real rental price R3 / P and capital stock K2, then holding other factors constant, an improvement in technology that increases the marginal productivity of capital will move:

Accepted Answer

A) the demand curve from D2 to D1. 
B) the demand curve from D2 to D3. 
C) the supply of capital from K2 to K1. 
D) the supply of capital from K2 to K3.

Question 5

Graphically illustrate (1) what happens to the rental price of capital and the marginal product of capital as the stock of capital increases and (2) how the change in the marginal product of capital changes the investment demand function. Explain in words how this process will continue in the long run until the steady state is reached.

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Question 6

If the real rental price of capital is $10,000 per unit and the real cost of capital is $9,000 per unit, to maximize profits a firm should:

Accepted Answer

A) add to its capital stock. 
B) let its capital stock shrink. 
C) keep its capital stock unchanged. 
D) reduce the real rental price of capital.

Question 7

According to Franco Modigliani's life-cycle hypothesis, the time of life at which an individual should have the largest amount of wealth is at:

Accepted Answer

A) birth. 
B) death. 
C) retirement. 
D) their parents' death.

Question 8

In equilibrium, other things being equal, all of the following changes will increase the real rental price of capital except:

Accepted Answer

A) a lower quantity of labour employed. 
B) a lower stock of capital. 
C) better technology. 
D) a higher labour-capital ratio.

Question 9

Tobin's q equals the:

Accepted Answer

A) cost of buying and renting out one unit of capital measured in units of the economy's output. 
B) marginal product of capital minus the cost of capital. 
C) ratio of the replacement value of installed capital to the market value of depreciated capital. 
D) ratio of the market value of installed capital to the replacement cost of installed capital.

Question 10

The corporate income tax is a tax on the:

Accepted Answer

A) earnings of employees of a corporation. 
B) dividends paid to the shareholders of a corporation. 
C) earnings of the managers of a corporation. 
D) profits of a corporation.

Question 11

The existence of financing constraints makes investment:

Accepted Answer

A) more sensitive to current conditions. 
B) less sensitive to current conditions. 
C) spending follow a random walk. 
D) spending increase during recessions.

Question 12

A consumer spending excessively today, intending to start saving for retirement tomorrow, but deciding to continue spending when tomorrow arrives is an example of:

Accepted Answer

A) an income effect offsetting a substitution effect. 
B) time-inconsistent preferences. 
C) spending out of permanent income, but not out of transitory income. 
D) an intertemporal budget constraint.

Question 13

Assume that the government levies a one-time-only tax on oil companies equal to a proportion of the value of the company's oil reserves. According to the neoclassical model, if firms face no financing constraints and also believe the tax will not be repeated, the effect of this tax on investment by these firms will be to:

Accepted Answer

A) decrease investment. 
B) not affect investment. 
C) increase investment. 
D) decrease the rental price of capital but not change the cost of capital.

Question 14

While a rental firm is renting out its capital, the price of capital can change. What is the impact of a changed capital price on the firm?

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Question 15

According to Modigliani's life-cycle hypothesis, if a consumer wants equal consumption in every year and the interest rate is zero, then the marginal propensity to consume out of wealth _____ as years _____ decrease.

Accepted Answer

A) increases; of life remaining 
B) decreases; of life remaining 
C) increases; until retirement 
D) decreases; until retirement

Question 16

The real interest rate should be inversely related to investment in:

Accepted Answer

A) plant and equipment, home building, and inventories. 
B) plant and equipment and home building, but not inventories. 
C) plant and equipment and inventories, but not home building. 
D) inventories and home building, but not plant and equipment.

Question 17

Why did Keynes's conjectures hold up well in the studies of household data and short time-series but fail when long time-series were examined?

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Question 18

According to Hall, consumption spending follows a random walk.
a.What determines changes in consumption in this case?
b.What is the implication of following a random walk for predicting changes in consumption?

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Question 19

Which production function do economists suggest using to see what variables influence the equilibrium rental price? Explain.

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Question 20

According to the permanent income hypothesis, households will finance a temporary increase in taxes by: reducing _____ or increasing _____.

Accepted Answer

A) consumption; saving 
B) saving; borrowing 
C) permanent income; transitory income 
D) transitory income; permanent income

Exam 19: The Microfoundations of Consumption and Investment

What is the impact on current consumption of a temporary tax cut according to: a.the Keynesian consumption function? b.the permanent-income hypothesis?