Macro HW 4 (Ch.9)

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

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

The substitution effect of a change in the real interest rate is an example of A) an intertemporal substitution effect. B) an atemporal substitution effect. C) a temporary substitution effect. D) an intratemporal substitution effect.

A) an intertemporal substitution effect.

An important reason why Ricardian equivalence may fail is if A) government debt incurred today may not be paid off until after some current consumers are deceased. B) some consumers are borrowers, while other consumers are lenders. C) borrowing and lending are done through intermediaries. D) state and local governments also engage in debt finance.

A) government debt incurred today may not be paid off until after some current consumers are deceased.

Permanent income is A) the constant income corresponding to lifelong wealth. B) income that cannot be taxed. C) income that cannot be lent. D) the minimum income obtained throughout lifetime.

A) the constant income corresponding to lifelong wealth.

For a borrower, 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.

B) reduces current consumption and has an uncertain effect on future consumption.

An increase in the real interest rate is an example of a A) substitution effect and a negative income effect. B) substitution effect and an income effect whose sign depends on whether the consumer is initially a borrower or a lender. C) substitution effect and a positive income effect. D) pure substitution effect.

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

One aspect of the analysis the model ignores when the government significantly increases its debt is A) the impact on household savings. B) the impact on the real interest rate. C) the impact on consumption. D) the impact on taxes.

B) the impact on the real interest rate.

With higher future taxes A) current consumption stays the same. B) current consumption increases. C) current consumption declines. D) current consumption depends on other factors.

C) current consumption declines.

For a lender, an increase in the real interest rate A) definitely reduces current consumption and increases future consumption. B) has an uncertain effect on both current and future consumption. C) has an uncertain effect on current consumption and increases future consumption. D) reduces current consumption and has an uncertain effect on future consumption.

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

An increase in the government deficit leads to A) it depends on the marginal propensity to consume. B) an increase in current consumption. C) no change in current consumption. D) a decrease in current consumption.

C) no change in current consumption.

Why are there no savings in the household's lifetime budget constraint? A) savings are fully taxed. B) savings do not have an impact. C) savings are future consumption. D) savings are zero.

C) savings are future consumption.

In a two-period model, government spending is financed through A) taxes only. B) taxes and transfer payments. C) taxes and issuing debt. D) taxes and redeeming debt.

C) taxes and issuing debt.

The Ricardian equivalence implies that A) the distribution of government expenses though time has no impact. B) the level of government spending has no impact. C) the distribution of taxes through time has no impact. D) the level of taxes has no impact.

C) the distribution of taxes through time has no impact.

The government's present value budget constraint states that A) the government may run deficits each and every year, as long as the deficits are sufficiently small. B) taxes must equal government spending in each period. C) the present value of government spending must be equal to the present value of taxes. D) 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.

For a competitive equilibrium in a two-period model, all of the following must be true except A) the credit market clears. B) each consumer picks first- and second-period consumption given the real interest rate. C) there must be an equal number of borrowers and lenders. D) the government's present-value budget constraint holds.

C) there must be an equal number of borrowers and lenders.

For the consumer to be at an optimum, it must be the case that A) MRSc,c' = 1(1 + r) B) MRTc,c' = (1 + r) C) MRTc,c' = 1(1 + r) D) MRSc,c' = (1 + r)

D) MRSc,c' = (1 + r)

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

D) a small increase in current consumption.

Distorting taxes can invalidate Ricardian equivalence because A) they are more popular, politically, than lump-sum taxes. B) they confuse consumers about the need for government to repay its debt. C) they are inferior to lump-sum taxes. D) alternative ways of collecting the same tax revenue produce different amounts of lost welfare.

D) alternative ways of collecting the same tax revenue produce different amounts of lost welfare.

There are no bonds in the present value budget constraint of the government because A) no, bonds are in the intertemporal budget constraint. B) bonds are zero. C) bonds do not matter. D) bonds are future taxes.

D) bonds are future taxes.

The two primary explanations for the excess volatility of consumption are A) consumers' limited life spans and credit market imperfections. B) distorting taxes and consumers' limited life spans. C) changes in market prices and distorting taxes. D) credit market imperfections and changes in market prices.

D) credit market imperfections and changes in market prices.

Intertemporal decisions involve economic decisions A) made in between two periods of time. B) that ignore concerns about the future. C) made within a given period of time. D) involving trade-offs across periods of time.

D) involving trade-offs across periods of time.

A consumer is a lender if A) optimum current consumption is greater than current disposable income. B) current disposable income is greater than future disposable income. C) the consumer's indifference curves are relatively flat. D) optimum current consumption is less than current disposable income.

D) optimum current consumption is less than current disposable income.

Consumption smoothing refers to A) the tendency of consumers to seek a consumption path over time that is smoother than income. B) the tendency of all consumers to choose the same amount of current consumption. 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.

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

The Ricardian Equivalence holds only if A) there are no credit constraints. B) the government runs deficits. C) the government is altruistic. D) the government runs surpluses.

A) there are no credit constraints.

For a borrower in a (c,c') graph, the optimal consumption bundle is A) to the right of the endowment point. B) on the endowment point. C) to the left of the endowment point. D) dependent on other factors.

A) to the right of the endowment point.

A good proxy for the flow of consumption services would be A)consumption of nondurables and consumption of services. B) consumption of durables and consumption of nondurables. C) aggregate consumption. D) consumption of services and consumption of durables.

A)consumption of nondurables and consumption of services.

A permanent decrease in taxes leads to A) a small decrease in future consumption. B) a large increase in current consumption. C) a small increase in current consumption. D) a large decrease in future consumption.

B) a large increase in current consumption.

An increase in second-period income results in A) an increase in first-period consumption, a decrease in second-period consumption, and an increase in saving. B) an increase in first-period consumption, an increase in second-period consumption, and a decrease 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 an increase in saving.

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

In the absence of a financial system, the two-period model without taxes predicts that A) consumption is less volatile than output. B) consumption is as volatile as output. C) consumption is more volatile that output. D) We do not know.

B) consumption is as volatile as output.

The endowment point is the consumption bundle in which A) second-period consumption is equal to zero. B) consumption is equal to disposable income in each period. C) the consumer finds the most utility. D) first-period consumption is equal to zero.

B) consumption is equal to disposable income in each period.

If current income increases as much as future income decreases A) current consumption decreases. B) current consumption increases. C) current consumption stays the same. D) We do not know.

B) current consumption increases.

If the interest rate increases, lifetime wealth (we) A) changes in an ambiguous way. C) increases. B) decreases. D) stays constant.

B) decreases.

An increase in the real interest rate A) increases savings for lenders, but has an uncertain effect on the savings of borrowers. B) increases savings for borrowers, but has an uncertain effect on the savings of lenders. C) has an uncertain effect on the savings of both borrowers and lenders. D) increases savings for both borrowers and lenders.

B) increases savings for borrowers, but has an uncertain effect on the savings of lenders.

What raises permanent income? A) higher savings. B) lower current taxes C) higher future taxes D) higher future consumption

B) lower current taxes

The idea that a permanent increase in income causes a larger increase in consumption than a temporary change in income is called the A) Ricardian equivalence theorem. B) Friedman-Lucas theory. C) intertemporal substitution effect. D) permanent income hypothesis.

D) permanent income hypothesis.