Question 1

An increase in first-period income results in

Accepted Answer

A)   an increase in first-period consumption, an increase in second-period consumption, and an increase in saving.
B)   an increase in first-period consumption, a decrease in second-period consumption, and an increase in saving.
C)   a decrease in first-period consumption, an increase in second-period consumption, and an increase in saving.
D)   an increase in first-period consumption, an increase in second-period consumption, and a decrease in saving.
E)   a decrease in first-period consumption, a decrease in second-period consumption, and an increase in saving. A

Question 2

If we represents a two-period consumer's lifetime wealth and r denotes the real rate of interest,the vertical (future consumption)intercept of the consumer's budget line is equal to

Accepted Answer

A)   
B)   
C)   
D)   
E)    B

Question 3

To ensure a well-defined solution to the consumers' intertemporal choice problems,we must assume that consumers' preferences exhibit the properties that

Accepted Answer

A)   they are all identical and that more is always preferred to less.
B)   more is preferred to less and that the consumer prefers diversity.
C)   the consumer likes diversity and that more is sometimes preferred to less.
D)   more is sometimes preferred to less and that first-period consumption and second-period consumption are both normal goods.
E)   more is sometimes preferred to less and that first-period consumption and second-period consumption are both inferior goods. B

Question 4

The government's present value budget constraint states that

Accepted Answer

A)   taxes must equal government spending in each period.
B)   the present value of government spending must be equal to the present value of consumers' disposable incomes.
C)   the present value of government spending must be equal to the present value of taxes.
D)   the government may run deficits each and every year, as long as the deficits are sufficiently small.
E)   governments can increase spending as long as deficits are financed by issuing debt.

Question 5

The endowment point is the consumption bundle in which

Accepted Answer

A)   savings are zero.
B)   households maximize utility.
C)   permanent income is maximized.
D)   households are indifferent to interest rate changes.
E)   current consumption is equal to future consumption.

Question 6

According to Friedman,a primary determinant of a consumer's current consumption is

Accepted Answer

A)   current employment.
B)   current levels of GDP.
C)   rate of expected savings in the second period.
D)   permanent income.
E)   temporary income.

Question 7

The property of diminishing marginal rate of substitution follows from the property that the indifference curves are

Accepted Answer

A)   downward sloping.
B)   upward sloping.
C)   bowed in toward the origin.
D)   bowed out from the origin.
E)   negatively sloped.

Question 8

The government's future period budget constraint is:

Accepted Answer

A)   G' + (1+r) B = T'
B)   G' + T' = (1 + r) B
C)   G + G' = T - T'
D)   B = G - T
E)   G' = T' + (1 + r) B

Question 9

For all bonds to be indistinguishable,

Accepted Answer

A)   all consumers must never be expected to default on their debts.
B)   the government must guarantee all bonds.
C)   all consumers must be identical.
D)   they must be traded through financial intermediaries.
E)   only government can issue bonds.

Question 10

A consumer is a borrower if

Accepted Answer

A)   optimum current consumption is less than current disposable income.
B)   optimum current consumption is greater than current disposable income.
C)   future disposable income is greater than current disposable income.
D)   the consumer's indifference curves are relatively steep.
E)   the consumer's indifference curves are positively sloped.

Question 11

What is consumption smoothing and how is it affected with an increase in temporary and permanent income?

Accepted Answer

The answer of What is consumption smoothing and how is...

Question 12

A one-period bond is a promise to repay

Accepted Answer

A)   units of goods in the second period.
B)   r units of goods in the second period.
C)   (1 + r)  units of goods in the second period.
D)   the original amount lent.
E)   the real interest rate.

Question 13

If the consumer is a lender then

Accepted Answer

A)   
B)   
C)   
D)   
E)

Question 14

The Ricardian equivalence theorem implies that

Accepted Answer

A)   government debt policy must be handled correctly for the economy to prosper.
B)   the amounts of government spending are neutral.
C)   an increase in government spending has no effect on the economy, as long as there is an equal change in taxes.
D)   the timing of taxes collected by the government is neutral.
E)   the present value of government spending must be equal to the present value of taxes.

Question 15

When different consumers pay different amounts of taxes,Ricardian equivalence may fail because

Accepted Answer

A)   alternative ways of collecting the same tax revenue can have different welfare effects.
B)   consumers can become jealous of one another.
C)   such differences in taxes create credit market imperfections.
D)   higher taxes on more talented people may be politically popular.
E)   such differences in taxes create welfare losses to the business community.

Question 16

We assume that the representative consumer's preferences exhibit the properties that

Accepted Answer

A)   they are convex and that more is always preferred to less.
B)   more is always preferred to less and that each consumer has one strictly favorite period of time for consumption.
C)   each consumer has one strictly favorite period of time for consumption and that current and future consumption are both normal goods.
D)   current and future consumption are both normal goods and that the consumer likes diversity in his or her consumption bundle.
E)   current and future consumption are both normal goods and that more is always preferred to less.

Question 17

The Ricardian Equivalent Theorem implies that a change in the timing of taxes

Accepted Answer

A)   has a positive effect on both consumption and the real interest rate.
B)   has a negative effect on both consumption and the real interest rate.
C)   affects consumption negatively and the real interest rate positively.
D)   affects consumption positively and the real interest rate negatively.
E)   has no effect on consumption or the real interest rate.

Question 18

A permanent decrease in taxes leads to

Accepted Answer

A)   a large increase in current consumption.
B)   a small increase in current consumption.
C)   a small decrease in current consumption.
D)   a large decrease in future consumption.
E)   no changes to consumption.

Question 19

Consumption-savings decisions involve intertemporal choice as this is a decision involving a tradeoff between

Accepted Answer

A)   consumption and investment.
B)   consumption and saving.
C)   current and future investment.
D)   current and future consumption.
E)   consumption per worker and income per worker.

Question 20

If the government reduces current taxes,government bonds increase,and according to Ricardian equivalence in the credit market

Accepted Answer

A)   the supply curve of private savings shifts to the left to keep the real interest rate constant.
B)   the real interest rate increases.
C)   private savings decreases by an amount equal to the increase in government bonds.
D)   the supply curve of private savings shifts right to keep the real interest rate constant.
E)   the supply curve of private savings shifts to the right and the real interest rate increases.

Exam 9: A Two-Period Model: The Consumption–Savings Decision and Credit Markets