Question 1

Errors made by researchers using the long-term estimate of the marginal propensity to consume to predict short-term movement in consumption can be extremely large. It is important, therefore, to understand when those errors might occur. If you were to draw the simple Keynesian consumption with MPC = 0.94 on a piece of graph paper, then you would expect to plot

Accepted Answer

A)   the combination of consumption and GDP for 1973 above the line.
B)   the combination of consumption for 1983 below the line.
C)   the combination of consumption and GDP for 1975 above the line.
D)   the combination of consumption and GDP for 1946 below the line.
E)   none of the above.F) A) and B)
G) B) and E)

Question 2

Knowing the desired size of the bequest is important in predicting the path of future consumption,

Accepted Answer

A)   but unfortunately it is inconsistent with the basic assumptions of the permanent income hypothesis.
B)   but unfortunately it is inconsistent with the basic assumptions of both the permanent income hypothesis and the life cycle hypothesis.
C)   but not knowing its precise size does little to undermine the general implications of any of the forward-looking consumption theories.
D)   but theories that explain bequest behavior are totally inconsistent with any forward-looking consumption theory.
E)   none of the above.F) A) and B)
G) B) and D)

Question 3

An increase in the marginal propensity to consume is most accurately thought of as

Accepted Answer

A)   a rightward shift of the IS curve.
B)   an increase in the interest sensitivity of the goods market.
C)   a decrease in the interest sensitivity of the goods market.
D)   both a and c.
E)   both a and b.F) D) and E)
G) B) and C)

Question 4

Suppose that an individual anticipated that the next calendar year's income would be $1,000 higher than this year's. Facing a real interest rate of 0 percent and a 20-year planning horizon, you would expect her annual real consumption to

Accepted Answer

A)   increase by $900 if the increase were permanent and $90 if it were a one-shot deal.
B)   increase by $1,000 if the increase were permanent and $100 if it were a one-shot deal.
C)   increase by $950 if the increase were permanent and $50 if it were a one-shot deal.
D)   remain the same for one year and then increase by $1,000 if the increase were permanent and by $50 if it were temporary.
E)   none of the above.F) C) and D)
G) D) and E)

Question 5

Modern forward-looking theories of consumption

Accepted Answer

A)   are founded on the pioneering work done by Milton Friedman and Franco Modigliani on the permanent income theory and the life cycle theory, respectively.
B)   are based on consumption depending on current disposable income, current wealth, and expected paths of disposable income and wealth in the future.
C)   assert that individuals make long-term consumption decisions each year, using as much information about the present and the future as possible.
D)   do not preclude individuals' changing consumption plans as new information presents itself.
E)   all of the above.F) A) and B)
G) A) and E)

Question 6

Short-run marginal propensities to consume are smaller than long-run propensities in part because

Accepted Answer

A)   people need time to decide whether or not an increase in income is permanent or temporary and the propensity applied to a permanent change is smaller than the propensity applied to a temporary change.
B)   people need time to decide whether or not an increase in income is permanent or temporary and the propensity applied to a permanent change is larger than the propensity applied to a temporary one.
C)   people make rash decisions in the short run and thereby overspend.
D)   it takes a long time for the consumer durables that dominate long- run consumption to be delivered and paid for.
E)   none of the above.F) A) and C)
G) C) and D)

Question 7

Which of the following circumstances is likely to exaggerate the expected shift in an IS curve in response to a reduction in taxes?

Accepted Answer

A)   A perception that the tax change is temporary
B)   A perception that the tax change is permanent
C)   A prior anticipation of higher taxes throughout the foreseeable future
D)   A prior anticipation that taxes would not change in the foreseeable future
E)   The certain knowledge that nothing is certain but death and taxesF) A) and D)
G) A) and E)

Question 8

Ando and Modigliani postulated a consumption function depending on not only disposable income but also the value of assets in which people keep their wealth. The estimated coefficient for asset value

Accepted Answer

A)   emerged in the neighborhood of 0.06, pretty close to the marginal propensity to consume that the theory might predict for temporary changes in income.
B)   emerged in the neighborhood of 0.7, a little low for the propensity to consume that the theory would predict for permanent changes in income.
C)   emerged as expected on the basis of theory in the 0.05 range, but the estimated marginal propensity to consume out of income was a bit low, in the 0.7 range.
D)   a and c.
E)   none of the above.F) A) and E)
G) B) and E)

Question 9

It has been argued that, "A tax cut must be followed later by a tax increase to pay for the resulting deficit" is the self-fulfilling prophecy of those who use it to predict that an income windfall from a tax reduction must be temporary. The argument can be supported by

Accepted Answer

A)   appealing to forward-looking consumption theory, which predicts that a temporary increase in income produces only a small increase in consumption.
B)   noting that small consumption increases produce very little economic stimulus.
C)   recalling that larger than expected gaps between actual and potential GDP mean larger deficits spawned by enlarged transfer programs and reduced tax revenues.
D)   all of the above.
E)   none of the above.F) A) and B)
G) B) and E)

Question 10

The short-run marginal propensity to consume can be derived statistically by calculating how

Accepted Answer

A)   the level of consumption responds to changes in the level of disposable income.
B)   changes in consumption respond to changes in disposable income from year to year.
C)   consumption is correlated to disposable income on a quarterly basis.
D)   changes in consumption of less durable goods respond to changes in disposable income.
E)   none of the above.F) A) and E)
G) A) and D)

Question 11

The impact of an increase in the real interest rate on consumption

Accepted Answer

A)   is difficult to measure since interest rates and income are moving simultaneously during the course of the business cycle.
B)   tend to make consumers defer consumption due to the substitution effect.
C)   tend to increase total consumption of individuals with positive wealth due to the income effect.
D)   tend to decrease total consumption of individuals with negative wealth due to the income effect.
E)   all of the above.F) A) and D)
G) C) and D)

Question 12

The short-run marginal propensity to consume is estimated on the basis of

Accepted Answer

A)   a straight-line equation that most accurately describes consumption as a function of personal disposable income.
B)   a curved-line equation that most accurately describes consumption as a function of personal disposable income.
C)   a straight-line equation that most accurately describes year-to-year changes in consumption as a function of year-to-year changes in personal disposable income.
D)   a curved-line equation that most accurately describes year-to-year changes in consumption as a function of year-to-year changes in personal disposable income.
E)   none of the above.F) A) and B)
G) A) and C)

Question 13

Suppose that people looked upon a $1,000 windfall as 50 percent permanent and 50 percent temporary. The short-run marginal propensity to consume out of that $1,000

Accepted Answer

A)   would be 50 percent because the entire permanent component would be spent in the year it was received.
B)   would be slightly higher than 50 percent because all the permanent component and a small part of the temporary component would be spent in the year it was received.
C)   would be significantly greater than 50 percent because people always spend at least 50 percent of even a temporary increase and all of a permanent increase.
D)   would be approximately 0.91 because that is the estimated "Keynesian" marginal propensity to consume.
E)   none of the above.F) D) and E)
G) C) and E)

Question 14

As consumption becomes more sensitive to the real rate of interest,

Accepted Answer

A)   the IS curve gets steeper and monetary policy grows more effective in manipulating GDP in the short run.
B)   the IS curve gets flatter and monetary policy grows more effective in manipulating GDP in the long run.
C)   the IS curve gets flatter and monetary policy grows more effective in manipulating GDP in the short run.
D)   the IS curve is unaffe c t e d, but monetary policy grows we a ker nonetheless.
E)   the IS curve gets steeper and monetary policy grows less effective in manipulating GDP in the long run.F) All of the above
G) A) and D)

Question 15

Suppose that the real interest rate climbs. In that case,

Accepted Answer

A)   the income effect pushes consumption in the first year up in opposition to the substitution effect that pushes down first-year consumption.
B)   the income effect pushes consumption up in the second year and is supported by a second push generated in year 2 by the substitution effect.
C)   it would be impossible to tell whether consumption increases or decreases in year 1 because the income and substitution effects push in opposite directions.
D)   the substitution effect tends to depress current consumption because future consumption becomes less expensive.
E)   all of the above.F) A) and E)
G) None of the above

Question 16

For the past 30 years in the United States, the long- and short-run marginal propensities to consume have been estimated to be

Accepted Answer

A)   0.72 and 0.94, respectively.
B)   11.2 and 4.1, respectively.
C)   0.94 and 0.77, respectively.
D)   identical and equal to 0.94.
E)   too volatile to attribute to a single number.F) A) and D)
G) A) and B)

Question 17

An intuitive explanation of the observed discrepancy between short- and long-run marginal propensities to consume must focus on why

Accepted Answer

A)   consumption falls by less than income in the short run but eventually achieves over 90 percent of income's decline.
B)   consumption climbs slower than income in the short run but eventually exhausts over 90 percent of income's increase.
C)   consumption moves more slowly in either direction than income in the short run but eventually matches either move almost exactly.
D)   a and b.
E)   none of the above.F) B) and E)
G) B) and D)

Question 18

Let the consumption function be given by C = 0.85 + 0.8YDP with permanent disposable income specified according to YDP = 0.75YD +
0) 25YD-1) . Let there be a permanent $1,000 increase in income. Two years later, consumption will have increased by

Accepted Answer

A)   $1,000.
B)   $850.
C)   $800.
D)   Something between $600 and $800.
E)   $600.F) B) and D)
G) B) and C)

Exam 10: Consumption Demand

As consumption becomes more sensitive to the real rate of interest,

Correct Answer
verified

The impact of an increase in the real interest rate on consumption

Correct Answer
verified

It has been argued that, "A tax cut must be followed later by a tax increase to pay for the resulting deficit" is the self-fulfilling prophecy of those who use it to predict that an income windfall from a tax reduction must be temporary. The argument can be supported by

Correct Answer
verified

An intuitive explanation of the observed discrepancy between short- and long-run marginal propensities to consume must focus on why

Correct Answer
verified

Let the consumption function be given by C = 0.85 + 0.8YDP with permanent disposable income specified according to YDP = 0.75YD + 0) 25YD-1) . Let there be a permanent $1,000 increase in income. Two years later, consumption will have increased by

Correct Answer
verified

Suppose that the real interest rate climbs. In that case,

Correct Answer
verified

Ando and Modigliani postulated a consumption function depending on not only disposable income but also the value of assets in which people keep their wealth. The estimated coefficient for asset value

Correct Answer
verified

Modern forward-looking theories of consumption

Correct Answer
verified

Which of the following circumstances is likely to exaggerate the expected shift in an IS curve in response to a reduction in taxes?

Correct Answer
verified

Short-run marginal propensities to consume are smaller than long-run propensities in part because

Correct Answer
verified

Suppose that people looked upon a $1,000 windfall as 50 percent permanent and 50 percent temporary. The short-run marginal propensity to consume out of that $1,000

Correct Answer
verified

The short-run marginal propensity to consume can be derived statistically by calculating how

Correct Answer
verified

The short-run marginal propensity to consume is estimated on the basis of

Correct Answer
verified

For the past 30 years in the United States, the long- and short-run marginal propensities to consume have been estimated to be

Correct Answer
verified

Knowing the desired size of the bequest is important in predicting the path of future consumption,

Correct Answer
verified

Suppose that an individual anticipated that the next calendar year's income would be $1,000 higher than this year's. Facing a real interest rate of 0 percent and a 20-year planning horizon, you would expect her annual real consumption to

Correct Answer
verified

An increase in the marginal propensity to consume is most accurately thought of as

Correct Answer
verified

Correct Answer
verified

Exam 10: Consumption Demand

As consumption becomes more sensitive to the real rate of interest,

Correct AnswerverifiedShow Answer

The impact of an increase in the real interest rate on consumption

Correct AnswerverifiedShow Answer

It has been argued that, "A tax cut must be followed later by a tax increase to pay for the resulting deficit" is the self-fulfilling prophecy of those who use it to predict that an income windfall from a tax reduction must be temporary. The argument can be supported by

Correct AnswerverifiedShow Answer

An intuitive explanation of the observed discrepancy between short- and long-run marginal propensities to consume must focus on why

Correct AnswerverifiedShow Answer

Let the consumption function be given by C = 0.85 + 0.8YDP with permanent disposable income specified according to YDP = 0.75YD + 0) 25YD-1) . Let there be a permanent $1,000 increase in income. Two years later, consumption will have increased by

Correct AnswerverifiedShow Answer

Suppose that the real interest rate climbs. In that case,

Correct AnswerverifiedShow Answer

Ando and Modigliani postulated a consumption function depending on not only disposable income but also the value of assets in which people keep their wealth. The estimated coefficient for asset value

Correct AnswerverifiedShow Answer

Modern forward-looking theories of consumption

Correct AnswerverifiedShow Answer

Which of the following circumstances is likely to exaggerate the expected shift in an IS curve in response to a reduction in taxes?

Correct AnswerverifiedShow Answer

Short-run marginal propensities to consume are smaller than long-run propensities in part because

Correct AnswerverifiedShow Answer

Suppose that people looked upon a $1,000 windfall as 50 percent permanent and 50 percent temporary. The short-run marginal propensity to consume out of that $1,000

Correct AnswerverifiedShow Answer

The short-run marginal propensity to consume can be derived statistically by calculating how

Correct AnswerverifiedShow Answer

The short-run marginal propensity to consume is estimated on the basis of

Correct AnswerverifiedShow Answer

For the past 30 years in the United States, the long- and short-run marginal propensities to consume have been estimated to be

Correct AnswerverifiedShow Answer

Knowing the desired size of the bequest is important in predicting the path of future consumption,

Correct AnswerverifiedShow Answer

Suppose that an individual anticipated that the next calendar year's income would be $1,000 higher than this year's. Facing a real interest rate of 0 percent and a 20-year planning horizon, you would expect her annual real consumption to

Correct AnswerverifiedShow Answer

An increase in the marginal propensity to consume is most accurately thought of as

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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