Question 1

A good proxy for the flow of consumption services would be

Accepted Answer

A)   aggregate consumption.
B)   consumption of services and consumption of durables.
C)   consumption of durables and consumption of nondurables.
D)   consumption of nondurables and consumption of services.E) A) and D)
F) B) and D)

Question 2

The desire to smooth consumption is reflected in

Accepted Answer

A)   the consumer's budget constraint.
B)   the curvature in a consumer's indifference curves.
C)   choice between present and future.
D)   the production possibilities frontier.E) C) and D)
F) A) and C)

Question 3

In the absence of a financial system,the two-period model without taxes predicts that

Accepted Answer

A)   consumption is more volatile that output.
B)   consumption is as volatile as output.
C)   consumption is less volatile than output.
D)   We do not know.E) A) and D)
F) A) and C)

Question 4

The substitution effect of a change in the real interest rate is an example of

Accepted Answer

A)   an intratemporal substitution effect.
B)   an intertemporal substitution effect.
C)   an atemporal substitution effect.
D)   a temporary substitution effect.E) A) and D)
F) A) and C)

Question 5

The endowment point is the consumption bundle in which

Accepted Answer

A)   first-period consumption is equal to zero.
B)   second-period consumption is equal to zero.
C)   the consumer finds the most utility.
D)   consumption is equal to disposable income in each period.E) A) and C)
F) C) and D)

Question 6

If current income increases as much as future income decreases

Accepted Answer

A)   current consumption decreases.
B)   current consumption stays the same.
C)   current consumption increases.
D)   We do not know.E) A) and B)
F) A) and D)

Question 7

At the endowment point,we have the property that

Accepted Answer

A)   c = c'.
B)   c = y - t.
C)   y - t = y' - t'.
D)   y = y'.E) A) and B)
F) A) and C)

Question 8

For the consumer to be at an optimum,it must be the case that

Accepted Answer

A)   MRSc,c' = 
B)   MRSc,c' = (1 + r) 
C)   MRTc,c' = 
D)   MRTc,c' = (1 + r) E) B) and C)
F) All of the above

Question 9

The idea that a permanent increase in income causes a larger increase in consumption than a temporary change in income is called the

Accepted Answer

A)   Friedman-Lucas theory.
B)   permanent income hypothesis.
C)   Ricardian equivalence theorem.
D)   intertemporal substitution effect.E) All of the above
F) None of the above

Question 10

We collapse the consumer's current-period and future-period budget constraints into a single lifetime budget constraint by

Accepted Answer

A)   assuming no default.
B)   substituting for savings.
C)   eliminating consumption smoothing.
D)   assuming the consumer knows the future.E) B) and D)
F) B) and C)

Question 11

Ricardian equivalence implies

Accepted Answer

A)   that when the government borrows more, the market real interest rate goes up.
B)   that if the government saves less, then the nation saves less.
C)   that when taxes are cut people consume more.
D)   that consumers will save their tax cuts to pay their future taxes.E) All of the above
F) B) and D)

Question 12

In a two-period model,government spending is financed through

Accepted Answer

A)   taxes and transfer payments.
B)   taxes and issuing debt.
C)   taxes and redeeming debt.
D)   taxes only.E) C) and D)
F) A) and D)

Question 13

The endowment point is the consumption bundle in which

Accepted Answer

A)   households maximize utility.
B)   households are indifferent to interest rate changes.
C)   permanent income is maximized.
D)   savings are zero.E) A) and D)
F) None of the above

Question 14

To assure a well-defined solution to the consumers' intertemporal choice problems,we must assume that consumers' preferences exhibit the properties that

Accepted Answer

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.E) B) and C)
F) B) and D)

Question 15

For a household in a (c,c') graph,the optimal consumption bundle is

Accepted Answer

A)   to the left of the endowment point.
B)   to the right of the endowment point.
C)   on the endowment point.
D)   dependent on other factors.E) None of the above
F) A) and C)

Question 16

The consumer's lifetime budget constraint states that

Accepted Answer

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.E) B) and D)
F) C) and D)

Question 17

The property of diminishing marginal rate of substitution follows from the property that the indifference curves are

Accepted Answer

A)   downward sloping.
B)   upward sloping.
C)   bowed in toward the origin.
D)   bowed out from the origin.E) None of the above
F) A) and B)

Question 18

The Ricardian equivalence theorem implies that

Accepted Answer

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.E) B) and D)
F) All of the above

Question 19

An important reason why Ricardian equivalence may fail is if

Accepted Answer

A)   borrowing and lending are done through intermediaries.
B)   government debt incurred today may not be paid off until after some current consumers are deceased.
C)   state and local governments also engage in debt finance.
D)   some consumers are borrowers, while other consumers are lenders.E) A) and B)
F) B) and C)

Question 20

We limit ourselves to two periods in the intertemporal model of the business cycle because

Accepted Answer

A)   we need to concentrate on the two phases of the business cycle.
B)   we can assume that people can live two periods of, say, 30 years.
C)   this is all we need to emphasize the intertemporal trade-off.
D)   we need an even number of periods.E) C) and D)
F) A) and C)

Exam 9: A Two-Period Model: The Consumption-Savings Decision and Credit Markets

A good proxy for the flow of consumption services would be

Correct AnswerverifiedShow Answer

The desire to smooth consumption is reflected in

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The endowment point is the consumption bundle in which

Correct AnswerverifiedShow Answer

An important reason why Ricardian equivalence may fail is if

Correct AnswerverifiedShow Answer

We limit ourselves to two periods in the intertemporal model of the business cycle because

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For a household in a (c,c') graph,the optimal consumption bundle is

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If current income increases as much as future income decreases

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Ricardian equivalence implies

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The property of diminishing marginal rate of substitution follows from the property that the indifference curves are

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The consumer's lifetime budget constraint states that

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For the consumer to be at an optimum,it must be the case that

Correct AnswerverifiedShow Answer

At the endowment point,we have the property that

Correct AnswerverifiedShow Answer

The idea that a permanent increase in income causes a larger increase in consumption than a temporary change in income is called the

Correct AnswerverifiedShow Answer

The endowment point is the consumption bundle in which

Correct AnswerverifiedShow Answer

To assure a well-defined solution to the consumers' intertemporal choice problems,we must assume that consumers' preferences exhibit the properties that

Correct AnswerverifiedShow Answer

In the absence of a financial system,the two-period model without taxes predicts that

Correct AnswerverifiedShow Answer

The substitution effect of a change in the real interest rate is an example of

Correct AnswerverifiedShow Answer

We collapse the consumer's current-period and future-period budget constraints into a single lifetime budget constraint by

Correct AnswerverifiedShow Answer

In a two-period model,government spending is financed through

Correct AnswerverifiedShow Answer

The Ricardian equivalence theorem implies that

Correct AnswerverifiedShow Answer

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