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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 | |
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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| 3 | |
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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| 4 | |
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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| 5 | |
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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| 6 | |
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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| 7 | |
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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| 8 | |
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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| 9 | |
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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| 10 | |
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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