Question 1

Which of the following is NOT a source of inefficiently low savings?&#10;A)shortsightedness of the current population&#10;B)too high of an interest rate&#10;C)risk aversion among investors&#10;D)government taxation/borrowing

Accepted Answer

Too high of an interest rate would actually incentivize saving, not deter it. Lower interest rates typically lead to higher borrowing and spending, while higher interest rates encourage individuals to save more in order to earn higher returns on their savings. Therefore, a high interest rate would not be a source of inefficiently low savings. The other choices (A, C, and D) could all be factors contributing to inefficiently low savings.

Question 2

A lower discount rate tends to lead to&#10;A)more public projects&#10;B)fewer public projects&#10;C)no change in public projects because markets adjust to the discount rate used&#10;D)no change in public projects because political actions don't take the discount rate into consideration

Accepted Answer

A lower discount rate makes it cheaper for the government to borrow funds, which typically leads to an increase in public spending on projects. This is because with a lower discount rate, the present value of future benefits from the project is higher, making it more cost-effective to undertake the project.

Question 3

In Figure 8-5 what is the level of savings prior to taxes? A)I₁ B)I₀ C)r* D)r₁

Accepted Answer

The level of savings prior to taxes is the vertical distance between IS1 and U1B0, which is equal to 10. Therefore, the correct option is B.

Question 4

When finding the weighted discount rate one should&#10;A)average the highest and lowest estimated social discount rate&#10;B)find the annualized present value of a project using the social discount rate&#10;C)subtract the social discount rate from the return on capital&#10;D)find the fraction of a projects costs that comes from displaces consumption and displaced investment

Accepted Answer

The weighted discount rate involves determining the proportion of a project's costs that come from displaced consumption and displaced investment, which helps in calculating the appropriate discount rate for evaluating the project's net present value.

Question 5

Substitution bias in inflation measures refers to&#10;A)the willingness of society to substitute future consumption with more present consumption than is optimal&#10;B)the tendency for consumers to substitute away from goods whose price rise more than average&#10;C)individuals substitution better quality goods for poor quality goods as their income rises&#10;D)the bias against certain students from a substitute teacher

Accepted Answer

Substitution bias in inflation measures refers to the tendency for consumers to substitute away from goods whose price rise more than average. This means that as prices of certain goods increase more than others, consumers tend to switch to cheaper alternatives, which may not accurately reflect the overall inflation measure.

Question 6

Rawls' Just Savings principle states that&#10;A)wealthier future generations should be ignored because only the poorest generations should be considered&#10;B)investment should only go towards projects that help the least well off in the future&#10;C)there is a moral requirement to save and grow until adequate justice is reached&#10;D)society should save just enough to maintain current levels of consumption for future generations

Accepted Answer

Rawls' Just Savings principle suggests that society has a moral obligation to save and invest resources in a way that ensures future generations can achieve a just and equitable society, essentially until such a state of adequate justice is reached. This principle is part of Rawls' broader theory of justice, which emphasizes fairness and equality.

Question 7

Taking into account intergeneration equity usually requires&#10;A)a higher discount rate&#10;B)a lower discount rate&#10;C)a declining discount rate&#10;D)b or c

Accepted Answer

Taking into account intergenerational equity often involves using a lower discount rate to give more weight to future benefits and costs, or a declining discount rate to adjust the weight given to future generations over time.

Question 8

The Social Rate of Time Preference is&#10;A)the preferred time for society to make an investment&#10;B)the rate at which society's income grows, changing their preferences&#10;C)the rate at which society is willing to trade present for future consumption&#10;D)the length of time society is willing to wait for a program's benefits to outweigh costs

Accepted Answer

The social rate of time preference refers to the rate at which society is willing to trade present consumption for future consumption. It reflects society's willingness to defer current consumption in exchange for future benefits, and is an important factor in evaluating long-term investments and policies.

Question 9

The shadow price of a good is&#10;A)the annualized price of the good over a given time period&#10;B)the price for that item on the black market&#10;C)the price of an item after discounting future benefits&#10;D)the maximum willingness to pay for that item

Accepted Answer

The shadow price of a good is the maximum willingness to pay for that item, which is the value the market places on that good. It is often used in cost-benefit analysis to measure the impact of a particular policy or project. Option A is incorrect because the shadow price is not necessarily the annualized price of the good over a given time period. Option B is incorrect because it refers to the price on the black market, which may not reflect the actual value of the good. Option C is incorrect because it refers to discounting future benefits, which is not directly related to the shadow price of a good.

Deck 8: Choosing a Discount Rate