Macro - Chapter 9

A temporary increase in income today leads to: A) a small increase in current consumption. B) a large increase in current consumption. C) a small decrease in future consumption. D) a large decrease in future consumption.

A) a small increase in current consumption.

Supposing Ricardian equivalence holds, an increase in current taxes: A) increases current aggregate consumption. B) reduces current aggregate consumption. C) reduces current saving. D) increases government spending.

C) reduces current saving.

The permanent income hypothesis and the Ricardian equivalence theorem: A) are the same thing. B) are related, but the first relates to the behavior of a single consumer while the second relates to the behavior of the whole economy. C) are related, but the first relates to the behavior of the whole economy, while the second relates to the behavior of a single consumer. D) are completely unrelated.

B) are related, but the first relates to the behavior of a single consumer while the second relates to the behavior of the whole economy.

At the endowment point, we have the property that: A) c = c' B) c = y - t C) y - t = y' - t' D) y = y'

B) c = y - t

In the data, which of the following is most volatile? A) real GDP B) consumption of durables C) consumption of nondurables D) consumption of services

B) consumption of durables

We use a two-period model because: A) the business cycle has two phases B) it is the simplest dynamic model. C) we want to make a distinction between young and old households. D) this is the horizon of the politicians that formulate policy.

B) it is the simplest dynamic model.

To assure a well-defined solution to the consumers' intertemporal choice problems, we must assume that consumers' preferences exhibit the properties that: A) consumers are all identical and that more is always preferred to less. B) more is preferred to less and that consumers prefer diversity. C) consumers like 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.

B) more is preferred to less and that consumers prefer diversity.

A consumer is a borrower if: 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.

B) optimum current consumption is greater than current disposable income.

Which of the following is not a reason for the Ricardian equivalence theorem to fail to hold? A) tax distortions B) people can borrow from the government. C) finite-lived people. D) credit market imperfections.

B) people can borrow from the government.

The consumer's lifetime budget constraint states that: 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.

B) the present value of lifetime consumption must be equal to the present value of lifetime disposable income.

Consumption smoothing refers to: A) the tendency of all consumers to choose the same amount of current consumption. B) the tendency of consumers to seek a consumption path over time that is smoother than income. C) the tendency of consumers to seek an income path over time that is smoother than consumption. D) consumer's concerns about going heavily into debt.

B) the tendency of consumers to seek a consumption path over time that is smoother than income.

The property of diminishing marginal rate of substitution follows from the property that the indifference curves are: A) downward sloping. B) upward sloping. C) bowed in toward the origin. D) bowed out from the origin.

C) bowed in toward the origin.

For a lender, an increase in the real interest rate: 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.

C) has an uncertain effect on current consumption and increases future consumption.

Savings in our model are: A) durable consumption. B) non-durable consumption. C) postponed consumption. D) money.

C) postponed consumption.

The government's present value budget constraint states that: 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.

C) the present value of government spending must be equal to the present value of taxes.

In the two-period model, r denotes: A) real income. B) the nominal interest rate. C) the real interest rate. D) current taxes.

C) the real interest rate.

An increase in second-period income results in: 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.

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

If government spending is held constant and Ricardian equivalence holds: A) an increase in the government budget deficit is always matched by a reduction in private savings. B) an increase in government savings is always matched by an increase in the government budget deficit. C) an increase in government savings is always matched by an equal increase in private savings. D) an increase in government savings is always matched by an equal reduction in private savings.

D) an increase in government savings is always matched by an equal reduction in private savings.

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

D) substitution effect and an income effect whose sign depends on whether the consumer is initially a borrower or a lender.

Lifetime wealth is: A) the quantity of assets the consumer has in the current period. B) current income plus future income. C) current income minus discounted future taxes. D) the present value of disposable income.

D) the present value of disposable income.

The Ricardian equivalence theorem implies that: 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.

D) the timing of taxes collected by the government is neutral.