Question 1

If the consumer is a lender then

Accepted Answer

A)   c  ≥\ge≥  y - t.
B)   c'  ≤\le≤  y' - t'.
C)   c = y - t.
D)   c  ≤\le≤  y - t.
E)   s  ≤\le≤  0. F) B) and E)
G) A) and E)

Question 2

If consumers expect a tax cut to be temporary,

Accepted Answer

A)   consumption remains unchanged.
B)   the increase in consumption will be much larger than for a permanent tax cut.
C)   the decrease in consumption will be much smaller than for a permanent tax cut.
D)   the overall effects are much larger than for a permanent tax cut.
E)   the increase in consumption will be much smaller than for a permanent tax cut.F) A) and D)
G) D) and E)

Question 3

An increase in the real interest rate is an example of a

Accepted Answer

A)   pure substitution effect.
B)   substitution effect and a positive income effect.
C)   substitution effect and a negative income effect.
D)   substitution effect and an income effect whose sign depends on whether the consumer is initially a borrower or a lender.
E)   positive substitution effect and a negative income effect.F) D) and E)
G) C) and D)

Question 4

A key channel for interest rate effects on real activity will be through

Accepted Answer

A)   temporary income.
B)   permanent income.
C)   aggregate consumption.
D)   aggregate investment.
E)   consumption and savings.F) A) and C)
G) C) and D)

Question 5

The marginal rate of substitution of current consumption for future consumption is

Accepted Answer

A)   the slope of the indifference curve.
B)   minus the slope of the difference curve.
C)   the downward slope of the budget constraint.
D)   the endowment point.
E)   the slope of the lifetime budget constraint.F) All of the above
G) A) and E)

Question 6

Ricardian equivalence suggests that the government must pay off its debt by

Accepted Answer

A)   reducing government spending in the future.
B)   increasing taxes in the future.
C)   transferring surpluses to the debt.
D)   reducing private savings in the future.
E)   increasing the real interest rate.F) A) and E)
G) C) and D)

Question 7

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.F) A) and B)
G) A) and D)

Question 8

When there are credit market imperfections, an increase in government debt may be advantageous because it

Accepted Answer

A)   discourages credit-constrained consumers from borrowing too much.
B)   increases the welfare of credit-constrained consumers.
C)   eliminates the problems that cause credit market imperfections.
D)   encourages more private saving.
E)   borrows at higher interest rates than consumers.F) All of the above
G) A) and E)

Question 9

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.F) A) and B)
G) None of the above

Question 10

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 favourite period of time for consumption.
C)   each consumer has one strictly favourite 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.F) A) and B)
G) A) and C) D

Question 11

For a lender, an increase in the real interest rate

Accepted Answer

A)   definitely reduces current consumption and increases future consumption.
B)   reduces current consumption and has an uncertain effect on future consumption.
C)   has an uncertain effect on current consumption and increases future consumption.
D)   has an uncertain effect on both current and future consumption.
E)   definitely reduces current consumption and future consumption.F) D) and E)
G) A) and B)

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.F) A) and D)
G) None of the above

Question 13

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

Accepted Answer

Consumption smoothing is the process of ...

Question 14

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

Accepted Answer

A)   we.
B)   we(1 + r) .
C)   
D)   
E)   -(1 + r) c + we(1 + r) .F) A) and E)
G) A) and C)

Question 15

Supposing Ricardian equivalence holds, an increase in current taxes

Accepted Answer

A)   increases current aggregate consumption.
B)   reduces current aggregate consumption.
C)   reduces current saving.
D)   increases government spending.
E)   reduces future aggregate consumption.F) B) and D)
G) B) and E)

Question 16

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.F) C) and D)
G) None of the above D

Question 17

Ricardian equivalence is often attributed to David Ricardo and more attributed to

Accepted Answer

A)   Gerald O'Driscoll.
B)   Adam Smith.
C)   Milton Friedman.
D)   Robert Barro.
E)   Robert Lucas.F) A) and B)
G) C) and D) D

Question 18

The consumer's lifetime budget constraint states that

Accepted Answer

A)   the present value of lifetime consumption must be equal to the present value of lifetime gross income.
B)   the present value of lifetime consumption must be equal to the present value of lifetime disposable income.
C)   the present value of lifetime consumption plus the present value of lifetime taxes to be paid must be equal to the present value of lifetime income.
D)   the present value of lifetime taxes to be paid by the consumer must be equal to the present value of government spending.
E)   he present value of lifetime consumption must be equal to the present value of savings.F) All of the above
G) A) and B)

Question 19

In the two-period model of the economy,

Accepted Answer

A)   borrowing rates of interest are greater than lending rates of interest.
B)   borrowing rates of interest are less than lending rates of interest.
C)   there is only one real interest rate.
D)   borrowing rates of interest are equal to lending rates of interest.
E)   there is only one nominal interest rate.F) A) and C)
G) D) and E)

Question 20

For a borrower, an increase in the real interest rate

Accepted Answer

A)   definitely reduces current consumption and increases future consumption.
B)   reduces current consumption and has an uncertain effect on future consumption.
C)   has an uncertain effect on current consumption and increases future consumption.
D)   has an uncertain effect on both current and future consumption.
E)   definitely reduces current consumption and future consumption.F) C) and D)
G) C) and E)

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

If the consumer is a lender then

Correct AnswerverifiedShow Answer

If consumers expect a tax cut to be temporary,

Correct AnswerverifiedShow Answer

An increase in the real interest rate is an example of a

Correct AnswerverifiedShow Answer

A key channel for interest rate effects on real activity will be through

Correct AnswerverifiedShow Answer

The marginal rate of substitution of current consumption for future consumption is

Correct AnswerverifiedShow Answer

Ricardian equivalence suggests that the government must pay off its debt by

Correct AnswerverifiedShow Answer

A consumer is a borrower if

Correct AnswerverifiedShow Answer

When there are credit market imperfections, an increase in government debt may be advantageous because it

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedD

For a lender, an increase in the real interest rate

Correct AnswerverifiedShow Answer

A one-period bond is a promise to repay

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

Correct AnswerverifiedConsumption smoothing is the process of ...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Supposing Ricardian equivalence holds, an increase in current taxes

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedD

Ricardian equivalence is often attributed to David Ricardo and more attributed to

Correct AnswerverifiedD

The consumer's lifetime budget constraint states that

Correct AnswerverifiedShow Answer

In the two-period model of the economy,

Correct AnswerverifiedShow Answer

For a borrower, an increase in the real interest rate

Correct AnswerverifiedShow Answer

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D

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Consumption smoothing is the process of ...
View Answer

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D

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D

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