Question 1

Autonomous consumption is 700 and the marginal propensity to consume is 0.6. Calculate the average propensity to save when disposable income is (a) 10,000, (b) 12,000, and (c) 15,000.

Accepted Answer

(a) 0.33; ...

Question 2

________ is to the random walk hypothesis as ________ is to behavioral economics.

Accepted Answer

A)   Sober calculation; paternal guidance
B)   Surprise; gratification
C)   Rational ignorance; studied optimization
D)   Unpredictability; regretE) B) and C)
F) A) and C)

Question 3

The optimal level of consumption is achieved when ________.

Accepted Answer

A)   consumption in one period is equal to consumption in the next period
B)   utility in one period is equal to utility in the next period
C)   all income and wealth has been spent
D)   the slope of the indifference curve is equal to the slope of the budget line.E) B) and C)
F) None of the above

Question 4

The theory of intertemporal choice, and the life-cycle and permanent income hypotheses have in common the assumption that ________.

Accepted Answer

A)   consumption decisions are affected by current expectations about lifetime resources
B)   consumption decisions are based on all available information
C)   current income, rather than expected income, has the greater influence on consumption decisions
D)   decisions to borrow and save are influenced much more by immediate circumstances than by long-term consequencesE) None of the above
F) B) and C)

Question 5

According to the permanent income hypothesis, permanent income is to ________ as transitory income is to ________.

Accepted Answer

A)   consumption; saving
B)   certain; hypothetical
C)   wealth; gambling
D)   saving; borrowingE) None of the above
F) B) and C)

Question 6

Real world economic data supports the view that higher interest rates are associated with ________.

Accepted Answer

A)   higher saving and consumption.
B)   lower saving and higher consumption.
C)   higher saving and lower consumption.
D)   lower saving and consumption.E) All of the above
F) A) and D)

Question 7

The after-tax income received by the household sector is known as ________.

Accepted Answer

A)   disposable income.
B)   retained earnings.
C)   net national product per capita.
D)   Gross Domestic Product.E) None of the above
F) B) and C)

Question 8

The Keynesian consumption function does not display consumption smoothing, because ________.

Accepted Answer

A)   the average propensity to consume rises with income
B)   the marginal propensity to consume is constant
C)   consumption is not affected by the real interest rate
D)   consumption is not affected by future incomeE) A) and C)
F) A) and B)

Question 9

According to the life-cycle hypothesis ________.

Accepted Answer

A)   households consume on the basis of their current income and liabilities.
B)   household consumption as a percentage of income varies over one's lifetime.
C)   current income is a function of future income.
D)   cycling to work everyday allows one to live a longer life.E) All of the above
F) A) and D)

Question 10

The view that the choices consumers face should be limited for their own good is known as ________.

Accepted Answer

A)   Keynesian theory.
B)   institutionalist theory.
C)   rational adaptations.
D)   libertarian paternalism.E) C) and D)
F) A) and B)

Question 11

The observation that changes in an economic variable are unpredictable suggests that the relevant variable follows ________.

Accepted Answer

A)   a random walk.
B)   tertiary unpredictability.
C)   the life-cycle hypothesis.
D)   the Tequila effect.E) All of the above
F) B) and C)

Question 12

The permanent income hypothesis highlights the phenomenon of ________.

Accepted Answer

A)   the intertemporal budget constraint
B)   a binding borrowing constraint
C)   autonomous consumption
D)   consumption smoothingE) A) and B)
F) A) and C)

Question 13

Which of the following is the correct statement of an intertemporal budget constraint?

Accepted Answer

A)   C1 = (1 + r) (W + Y1)  - C2 + Y2
B)   C2 = (1 + r) (W + Y1 - C1)  + Y2
C)   W = (1 + r) (Y1 + Y2)  - (C1 + C2) 
D)   Y2 = (1 + r) (W + Y1 - C1) E) A) and D)
F) A) and C)

Question 14

How consistent is the Keynesian consumption function with the random walk hypothesis?

Accepted Answer

For changes in aggregate income that are...

Question 15

The schedule describing the Keynesian consumption function will become steeper with an increase in ________.

Accepted Answer

A)   consumption spending.
B)   autonomous consumption.
C)   the marginal propensity to consume.
D)   the marginal propensity to save.E) None of the above
F) All of the above

Question 16

Typically, consumers respond to an increase in (expected)  future income by ________.

Accepted Answer

A)   shifting the budget constraint to the left
B)   increasing both current and future consumption
C)   saving more to increase future wealth
D)   waiting until the income is received before changing their consumption behaviorE) B) and C)
F) A) and B)

Question 17

The marginal propensity to consume describes ________.

Accepted Answer

A)   the tendency to consume fringe, or unusual items.
B)   the impact of a change in spending on income.
C)   the impact on consumption resulting from a change in income.
D)   lifetime consumption resources.E) All of the above
F) None of the above

Question 18

The ratio of consumption to income is known as ________.

Accepted Answer

A)   the average propensity to consume.
B)   the borrowing constraint.
C)   the marginal propensity to consume.
D)   subprime accommodation.E) A) and D)
F) A) and C)

Question 19

A theory of saving is necessarily a theory of consumption, because ________.

Accepted Answer

A)   by definition, any unit of disposable income that is not a consumption expenditure is a unit of saving
B)   consumption decisions are made after saving has occurred
C)   private saving is equal to private investment
D)   the goal of consumption choices is to achieve the desired level of savingsE) B) and C)
F) A) and C)

Question 20

Consumers who do not consistently discount the future over time are likely to ________.

Accepted Answer

A)   under-report their taxable income
B)   be unprepared financially for retirement
C)   opt in to employer-sponsored savings plans
D)   make excessive sacrifices on behalf of their childrenE) A) and B)
F) All of the above

Exam 18: Consumption and Saving

How consistent is the Keynesian consumption function with the random walk hypothesis?

Correct AnswerverifiedFor changes in aggregate income that are...View AnswerShow Answer

A theory of saving is necessarily a theory of consumption, because ________.

Correct AnswerverifiedShow Answer

According to the permanent income hypothesis, permanent income is to ________ as transitory income is to ________.

Correct AnswerverifiedShow Answer

The theory of intertemporal choice, and the life-cycle and permanent income hypotheses have in common the assumption that ________.

Correct AnswerverifiedShow Answer

Typically, consumers respond to an increase in (expected) future income by ________.

Correct AnswerverifiedShow Answer

The Keynesian consumption function does not display consumption smoothing, because ________.

Correct AnswerverifiedShow Answer

The view that the choices consumers face should be limited for their own good is known as ________.

Correct AnswerverifiedShow Answer

Consumers who do not consistently discount the future over time are likely to ________.

Correct AnswerverifiedShow Answer

According to the life-cycle hypothesis ________.

Correct AnswerverifiedShow Answer

The after-tax income received by the household sector is known as ________.

Correct AnswerverifiedShow Answer

The permanent income hypothesis highlights the phenomenon of ________.

Correct AnswerverifiedShow Answer

The optimal level of consumption is achieved when ________.

Correct AnswerverifiedShow Answer

The ratio of consumption to income is known as ________.

Correct AnswerverifiedShow Answer

The schedule describing the Keynesian consumption function will become steeper with an increase in ________.

Correct AnswerverifiedShow Answer

Real world economic data supports the view that higher interest rates are associated with ________.

Correct AnswerverifiedShow Answer

The marginal propensity to consume describes ________.

Correct AnswerverifiedShow Answer

Which of the following is the correct statement of an intertemporal budget constraint?

Correct AnswerverifiedShow Answer

________ is to the random walk hypothesis as ________ is to behavioral economics.

Correct AnswerverifiedShow Answer

The observation that changes in an economic variable are unpredictable suggests that the relevant variable follows ________.

Correct AnswerverifiedShow Answer

Autonomous consumption is 700 and the marginal propensity to consume is 0.6. Calculate the average propensity to save when disposable income is (a) 10,000, (b) 12,000, and (c) 15,000.

Correct Answerverified(a) 0.33; ...View AnswerShow Answer

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For changes in aggregate income that are...
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According to the permanent income hypothesis, permanent income is to as transitory income is to .

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is to the random walk hypothesis as is to behavioral economics.

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(a) 0.33; ...
View Answer