Deck 15: Consumption

Question 1

The model used to treat consumption is called the ___________ consumption model.

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

Answer 1

D

Question 2

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

A)current consumption does not have to equal current income.
B)there are no income transfers between today and the future.
C)lifetime consumption equals total wealth.
D)current and future consumption must be equal.
E)a and c

Answer 2

E

Question 3

Use Figure 15.1 to answer the following questions.
Consider the utility functions in Figure 15.1 above.Curve b exhibits:

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

Answer 3

C

Question 4

In the simple ___________ model of consumption we consider a ___________ period lifetime.

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

Question 5

The consumer chooses her ___________ to maximize her __________.

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

Question 6

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

A)
B)
C)
D)
E)

Question 7

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 8

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.

Question 9

Human wealth is given by:

A)education.
B)present value of labor income.
C)health.
D)human capital accumulation.
E)government transfers.

Question 10

The intertemporal budget constraint is written as:

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

Question 11

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 12

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 you worse off.
D)more consumption leads to declining utility.
E)additional units of consumption raises utility by smaller and smaller amounts.

Question 13

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 14

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

A)
B)
C)
D)
E)

Question 15

Which of the following is not household consumption?

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

Question 16

Use Figure 15.1 to answer the following questions.
Consider the utility functions in Figure 15.1.Which of the following exhibits diminishing marginal utility?

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

Question 17

Use Figure 15.1 to answer the following questions.
In the utility functions in Figure 15.1,curve b exhibits:

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

Question 18

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 19

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 20

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 21

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 22

With logarithmic utility,the Euler equation is given by:

A) .
B)
C) .
D)either c or e
E) .

Question 23

The parameter
In the consumer's lifetime utility function represents the ___________ and is __________.

A)weight he 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 24

Your lifetime utility is a function of:

A)today's consumption and future consumption.
B)future consumption.
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 25

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 26

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 10 percent of its income.
E)choosing lifetime consumption which satisfies the intertemporal budget constraint.

Question 27

The household problem is to solve:

A) .
B) ,subject to,
C) subject to,
D) ,subject to,
E) ,subject to,

Question 28

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 29

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 30

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 31

The equation
Is called:

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

Question 32

With logarithmic utility,the Euler equation is given by:

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

Question 33

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

A)
B)
C)
D)
E)

Question 34

In the text
Is given by:

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

Question 35

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

A)
B)
C)
D)
E)

Question 36

The Euler equation states:

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 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

If the Euler equation did not hold,then:

A)the real interest rate would be zero.
B)a consumer would not spend all her lifetime wealth.
C)a consumer could move consumption from the future to the present and increase lifetime utility.
D)a consumer could move consumption from the present to the future and increase lifetime utility.
E)either c or d

Question 38

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 39

If
In your lifetime utility function,then:

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

Question 40

In the special case where b = 1 and with logarithmic utility,the Euler equation is given by:

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

Question 41

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

Question 42

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

A)household 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 43

From the Euler equation,if
Then ___________ and __________.

A)
B)
C)
D)
E)

Question 44

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 45

Using the neoclassical model of consumption,an implication of the permanent income hypothesis is ___________ because of __________.

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

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 marginal utility is constant.

Question 47

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 48

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)present value of wealth remains unchanged and consumption today does not change;Ricardian equivalence

Question 49

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

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

Question 50

Suppose
,
,R = 0.05;and assuming logarithmic utility,what is consumption today?

A)$75,000
B)$35,714.29
C)$39,375
D)$37,500
E)not enough information

Question 51

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 52

Use Figure 15.2 to answer the following questions.
In Figure 15.2 above,the point e is equal to:

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

Question 53

Use Figure 15.2 to answer the following questions.
According to the utility function in Figure 15.2 above,

A)people's lifetime utility is equal to .
B)people prefer to consume the average over their lifetime rather than and
.
C)the utility associated with consuming the average over both periods is greater than the average of and
.
D) .
E)b and c

Question 54

If you live T periods,
,R = 0,and with logarithmic utility;the marginal propensity of income is approximately equal to:

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

Question 55

Use Figure 15.2 to answer the following questions.
In Figure 15.2,the point c is equal to ___________ and implies __________.

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

Question 56

Use Figure 15.2 to answer the following questions.
An implication of Figure 15.2 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 57

Suppose
,
,R = 0.05;and assuming logarithmic utility,what is consumption in the future?

A)$75,000
B)$35,714.29
C)$39,375
D)$37,500
E)not enough information

Question 58

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;increasing 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 59

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 60

Consider consumption in two periods,
And
)Consumption smoothing implies:

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

Question 61

The consumer's lifetime utility is given as
.

Question 62

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 63

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 64

For the following questions refer to Figure 15.3 below.
Consider Figure 15.3.A possible cause for the fall in the saving rate between 1980 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 65

Behavioral economics blends economics with:

A)psychology.
B)marketing.
C)physics.
D)anthropology.
E)a and b

Question 66

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

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

Question 67

Consider two time periods,t and k:
represents the "future's" budget constraint.

Question 68

Individuals who have restricted access to credit markets:

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

Question 69

The utility function is constructed in such a way that consumption exhibits diminishing marginal utility.

Question 70

Which of the following summarize 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 71

If an individual has no access to credit markets:

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

Question 72

Precautionary savings leads 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 73

In the intertemporal budget constraint wealth is equal to lifetime income.

Question 74

Because people can't perfectly foresee income changes over their lifetime,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 75

For the following questions refer to Figure 15.3 below.
Consider Figure 15.3.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 76

___________ is when households save to hedge against uncertainty.

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

Question 77

According to the neoclassical model ___________ over their lifetime,however one study showed that ___________ at retirement.This puzzle was solved when two economist 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)don't maximize lifetime utility;they have zero income;dividend receipts
E)rely on transitory income;the discount factor is one;cost minimization

Question 78

In the intertemporal budget
is today's saving for the future.

Question 79

Household consumption accounts for about one-half of U.S.GDP.

Question 80

The intertemporal budget constraint is written as:
.