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| 1 | |
Keynes' theory of consumption behavior largely relied on the equation C = Co + cY. This equation implies that the value of the average propensity to consume |
| | A) | increases as the economy goes into a recession |
| | B) | increases as the economy goes into a boom |
| | C) | remains constant whether the economy goes into a boom or a recession |
| | D) | is always lower than the value of the marginal propensity to consume |
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| 2 | |
According to the life-cycle theory of consumption, an individual's |
| | A) | mpc out of transitory income is fairly large |
| | B) | mpc out of transitory income is fairly small |
| | C) | consumption sharply decreases after retirement |
| | D) | consumption is not affected at all by changes in wealth |
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| 3 | |
Assume a worker at age 30 with no wealth and an expected average annual earnings of $50,000, who wants to retire at age 65 and expects to live until age 80. According to the life-cycle hypothesis what dollar amount does that person consume annually? |
| | A) | $45,000 |
| | B) | $40,000 |
| | C) | $35,000 |
| | D) | $30,000 |
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| 4 | |
If you are age 25, have no accumulated wealth, and have an expected average annual income of $70,000, how much should you consume each year if you want to retire at age 65 and expect to live until age 75? You desire to leave no estate and to consume an equal amount in each of the next 50 years. |
| | A) | $60,000 |
| | B) | $56,000 |
| | C) | $52,000 |
| | D) | $48,000 |
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| 5 | |
After the stock market crash of 1987, when stock values dropped 23% and financial investors lost roughly $500 billion in wealth, what should we have expected to see according to the life-cycle hypothesis? |
| | A) | no change in current consumption since financial investors lost only what they previously gained |
| | B) | an increase in consumption since many people were panic-stricken and sold their stocks |
| | C) | a decrease in current consumption of almost $500 billion |
| | D) | a drop in current consumption of less than $100 billion |
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| 6 | |
If we divide consumption expenditures into the purchases of non-durable goods and the purchases of durable goods, we realize that |
| | A) | the life-cycle and permanent-income theories apply much more to the consumption of non-durable goods than durable goods |
| | B) | the consumption of non-durable goods is much more interest sensitive than the consumption of durable goods |
| | C) | the consumption of non-durable goods is more strongly affected by a surprise change in income than the consumption of durable goods |
| | D) | the consumption of durable goods this year is largely the same as the consumption of durable goods last year |
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| 7 | |
The fact that the lure of 0% financing by U.S. car manufacturers in 2001 resulted in record sales of U.S. cars is an indication that |
| | A) | the permanent-income theory of consumption has no validity |
| | B) | the consumption of durable goods is not as variable as the consumption of non-durable goods |
| | C) | the theory of durable consumption goods is really a theory of investment applied to households |
| | D) | the consumption of durable goods is mostly determined by random events |
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| 8 | |
According to the permanent-income theory of consumption |
| | A) | the short-run multiplier is identical to the long-run multiplier |
| | B) | the short-run multiplier is larger than the long-run multiplier |
| | C) | the short-run mpc is larger than the long-run mpc |
| | D) | the short-run mpc is smaller than the long-run mpc |
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| 9 | |
According to the permanent-income hypothesis |
| | A) | increases in current income lead to large increases in current consumption |
| | B) | current consumption is not significantly affected by a temporary change in income |
| | C) | the mpc out of transitory income is greater than the mpc out of permanent income |
| | D) | increases in the interest rate will affect consumption negatively |
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| 10 | |
A person who just won $20,000 in a lottery, is LEAST likely to do which of the following? |
| | A) | take a trip around the world |
| | B) | deposit $10,000 in a savings account and invest $10,000 in mutual funds |
| | C) | use it for a down payment on a house |
| | D) | buy some Microsoft stocks |
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| 11 | |
The random-walk theory of consumption |
| | A) | clearly contradicts the permanent-income theory |
| | B) | predicts that current consumption is most strongly affected by current income |
| | C) | predicts that this year's consumption is most strongly affected by last year's consumption |
| | D) | does not support the notion that people have rational expectations |
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| 12 | |
Robert Hall's random-walk theory of consumption can best be described by the equation |
| | A) | Ct = Co + cYt |
| | B) | Ct = cYPt |
| | C) | Ct = (1 + r)(Yt-1 - Ct-1) |
| | D) | Ct = Ct-1 + ε |
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| 13 | |
The fact that consumption exhibits "excess smoothness" implies that |
| | A) | consumption responds too strongly to surprise changes in income |
| | B) | current consumption can be predicted based on changes in current income |
| | C) | changes in transitory income have no effect on current consumption or saving |
| | D) | none of the above |
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| 14 | |
Part of the sensitivity of current consumption to changes in current income arises from |
| | A) | people's inability to borrow when their current income decreases |
| | B) | the fact that people are myopic |
| | C) | the fact that people are not as forward looking as the permanent income theory suggests |
| | D) | all of the above |
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| 15 | |
If we account for liquidity constraints, |
| | A) | we can explain why a temporary tax increase may have an effect on current consumption |
| | B) | we have to discard the permanent-income hypothesis |
| | C) | consumption becomes much more interest sensitive |
| | D) | consumption responds much less severely to surprise changes in income |
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| 16 | |
The simple life-cycle hypothesis suggests that people save largely to finance retirement; after retirement they draw on their accumulated wealth to maintain a steady consumption stream. However, this view |
| | A) | ignores the effect of interest rate changes on current consumption |
| | B) | is not consistent with the fact that the elderly rarely use up their accumulated wealth |
| | C) | ignores that most people are too impatient to achieve a certain target wealth level before retirement |
| | D) | does not explain why the long-run mpc is larger than the short-run mpc |
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| 17 | |
Household savings behavior tends to be fairly interest inelastic, which can be largely explained by |
| | A) | a very large substitution effect |
| | B) | the fact that the income effect dominates the substitution effect |
| | C) | the fact that the substitution effect is largely offset by the income effect |
| | D) | the fact that the consumption of durable goods tends to be very interest inelastic |
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| 18 | |
Which of the following is an objection to the Barro-Ricardo proposition? |
| | A) | people believe that debt-financing merely postpones taxation |
| | B) | people who benefit from a tax cut now are often not the same people who pay higher taxes later |
| | C) | a tax cut may ease a person's liquidity constraints, inducing the person to consume more |
| | D) | most people can borrow funds when necessary and therefore always consume according to their permanent income |
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| 19 | |
The strict Barro-Ricardo proposition that government bonds are not net wealth |
| | A) | relies on the fact that people assume that any tax cut that results in a budget deficit will be followed by a future tax increase |
| | B) | implies that expansionary fiscal policy that results in a higher budget deficit should result in an increase in private domestic saving |
| | C) | does not consider the possibility that those people who benefit from a tax cut today are not likely to be the same people who will be asked to pay higher taxes in the future |
| | D) | all of the above |
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| 20 | |
Which of the following statements is FALSE? |
| | A) | in the late 1990s, U.S. personal saving as a fraction of GDP declined sharply |
| | B) | in the late 1990s, U.S. government saving was positive |
| | C) | in 2005, both personal and government saving in the U.S. were negative |
| | D) | retained earnings constitute only a very small part of total national saving in the U.S. |
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