Review Chapter 18

30) A rightward shift in the intertemporal budget line would be caused by ________. A) a decrease in future income and an increase in wealth. B) an increase in future income and wealth. C) an increase in future income and a decrease in wealth. D) a decrease in future income and wealth.

B

32) Typically, consumers respond to an increase in (expected) future income by ________. 32) ______ A) saving more to increase future wealth B) shifting the budget constraint to the left C) increasing both current and future consumption D) waiting until the income is received before changing their consumption behavior

C

34) The substitution effect that occurs when interest rates change involves a change in consumption that develops from ________. 34) ______ A) a period of increasing productivity. B) a change in the level of income. C) a change in the relative prices of consumption in the two periods. D) a change in the general level of prices.

C

42) The Keynesian consumption function and the theory of intertemporal choice are consistent for households ________. 42) ______ A) whose consumption remains positive, even if income is zero B) with a binding budget constraint C) whose consumption cannot exceed current income D) with little or no initial wealth

C

49) According to rational expectations, expectations will only change in the event that ________. 49) ______ A) wealth changes. B) permanent income changes. C) unanticipated new information arises. D) current income changes.

C

26) An intertemporal budget constraint ________. 26) ______ A) describes how much a person can consume today versus tomorrow. B) divides consumption spending into three categories: spending on durables, non-durables and services. C) is independent of the real interest rate and wealth of the household. D) describes how much time an individual consumer has to spend their disposable net national product.

A

27) An intertemporal budget constraint is downward sloping due to ________. A) the trade-off between current and future consumption. B) the law of demand. C) the law of diminishing marginal productivity. 27) ______ D) the law of supply.

A

31) Consumption smoothing is a logical consequence of ________. 31) ______ A) the convexity of indifference curves and the ability to borrow and lend. B) the negative slope fo the intertemporal budget constraint. C) basing decision-making on real rather than nominal interest rates. D) rational expectations.

A

33) Real world economic data supports the view that higher interest rates are associated with ________. A) higher saving and lower consumption. B) lower saving and higher consumption. C) higher saving and consumption. D) lower saving and consumption. 33) ______

A

37) For consumers with a binding borrowing constraint, a decrease in the real interest rate ________. A) has no impact on consumption B) decreases consumption now, and in the future C) increases consumption now, and in the future D) decreases consumption now, and increases future consumption

A

38) When the borrowing constraint is binding, ________. 38) ______ A) consumption smoothing is not possible B) wealth is zero C) current consumption is lower than future consumption D) future consumption is lower than current consumption

A

41) The Keynesian consumption function does not display consumption smoothing, because ________. 41) ______ A) consumption is not affected by future income B) the marginal propensity to consume is constant C) consumption is not affected by the real interest rate D) the average propensity to consume rises with income

A

44) The permanent income hypothesis highlights the phenomenon of ________. 44) ______ A) consumption smoothing B) autonomous consumption C) the intertemporal budget constraint D) a binding borrowing constraint

A

48) The observation that changes in an economic variable are unpredictable suggests that the relevant variable follows ________. 48) ______ A) a random walk. B) tertiary unpredictability. C) the Tequila effect. D) the life-cycle hypothesis.

A

35) In practice, it is usual to assume that, in explaining the impact of a change in interest rates ________. A) the income and substitution effects cancel out with one another. B) the substitution effects outweigh the income effects. C) the income effect increases the severity of the substitution effect. D) the income effect outweighs the substitution effect.

B

39) The ratio of consumption to income is known as ________. 39) ______ A) the marginal propensity to consume. B) the average propensity to consume. C) the borrowing constraint. D) subprime accommodation.

B

40) If high incomes inspire more saving than low incomes ________. A) the average propensity to consume rises as wealth rises B) the average propensity to consume falls as income rises C) autonomous consumption falls as income rises D) the marginal propensity to consume rises as income rises 40) ______

B

43) According to the permanent income hypothesis, consumption spending depends largely on ________. 43) ______ A) the savings rate. B) current income. C) a consumerʹs lifetime resources. D) the level of current income plus the value of the assets owned by the household.

C

50) Consumers who do not consistently discount the future over time behave in a fashion that is most consistent with ________. 50) ______ A) the life-cycle hypothesis B) the permanent income hypothesis C) the Keynesian theory of consumption D) the theory of intertemporal choice

C

28) Along any single indifference curve the ________. A) level of future income is unchanged. B) level fo current and future income is unchanged. C) level of current income is unchanged. 28) ______ D) consumer is equally satisfied any and all of the combinations of goods being consumed.

D

29) The rate at which a consumer is willing to give up consumption in one period for additional consumption in another is known as ________. 29) ______ A) the marginal propensity to save. B) the average propensity to consume. C) the marginal propensity to consume. D) the marginal rate of substitution.

D

36) For the majority of the U.S. population ________. 36) ______ A) a change in lifetime resources will not change future consumption. B) a change in lifetime resources will not change current consumption. C) consumption is driven solely by current income. D) consumption smoothing is possible.

D

45) If households come to believe that permanent income has not changed ________. A) their life-cycle will be affected. B) they will consume on the basis of their current income. C) the impact of a given change in taxes on spending will be enhanced. D) the impact of a change in taxes on spending will be limited.

D

46) According to the permanent income hypothesis, the impact of ________. 46) ______ A) a change in transitory income on consumption is greater than the impact resulting from a change in permanent income. B) a change in permanent income on consumption is larger than the impact resulting from a change in future income. C) a change in transitory income is felt primarily through changes in the total tax revenue paid to the federal government. D) a change in permanent income on consumption is greater than the impact resulting from a change in transitory income.

D

47) Intertemporal choice theory is more consistent with ________. 47) ______ A) Keynesian theory than the permanent income hypothesis of Friedman. B) Keynesian theory than the life-cycle hypothesis. C) Keynesian theory than the Gini coefficient theory. D) the permanent income hypothesis than Keynesian theory.

D