Question 1

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.F) A) and E)
G) C) and D)

Question 2

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 3

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 E)
G) A) and B)

Question 4

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.F) C) and E)
G) B) and E)

Question 5

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.F) A) and E)
G) A) and B) B

Question 6

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.F) C) and D)
G) D) and E)

Question 7

If the consumer is a lender then

Accepted Answer

A)   
B)   
C)   
D)   
E)   F) A) and D)
G) A) and E)

Question 8

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

Question 9

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 E)
G) A) and C)

Question 10

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.F) C) and E)
G) A) and E)

Question 11

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.F) A) and C)
G) All of the above

Question 12

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.F) A) and B)
G) C) and E)

Question 13

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) BF) C) and D)
G) A) and B)

Question 14

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.F) B) and C)
G) A) and B)

Question 15

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) All of the above
G) A) and E)

Question 16

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.F) All of the above
G) A) and C) A

Question 17

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)   F) A) and B)
G) A) and C) B

Question 18

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

Question 19

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.F) All of the above
G) C) and D)

Question 20

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

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

The endowment point is the consumption bundle in which

Correct AnswerverifiedShow Answer

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

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedB

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

Correct AnswerverifiedShow Answer

If the consumer is a lender then

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A consumer is a borrower if

Correct AnswerverifiedShow Answer

For all bonds to be indistinguishable,

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The government's present value budget constraint states that

Correct AnswerverifiedShow Answer

The government's future period budget constraint is:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A one-period bond is a promise to repay

Correct AnswerverifiedShow Answer

An increase in first-period income results in

Correct AnswerverifiedA

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

Correct AnswerverifiedB

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

Correct AnswerverifiedShow Answer

A permanent decrease in taxes leads to

Correct AnswerverifiedShow Answer

The Ricardian equivalence theorem implies that

Correct AnswerverifiedShow Answer

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Consumption smoothing is the process of ...
View Answer

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B

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A

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B

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