Deck 15: Household and Firm Behavior in the Macroeconomy: a Further Look

Question 1

According to the life-cycle theory of consumption, people tend to consume ________ they earn during their early and later years.

A) more than
B) less than
C) the same as
D) an amount unrelated to what

Answer 1

A

Question 2

The larger the percentage of people who work, the ________ output per capita.

A) higher the potential
B) lower the potential
C) higher the actual
D) lower the actual

Answer 2

A

Question 3

Mickey got a raise from $14 an hour to $20 an hour. As a result of the wage increase, Mickey desires to work more hours and take less hours of leisure. For Mickey

A) the substitution effect dominates the income effect.
B) the income effect dominates the substitution effect.
C) the substitution effect must equal the income effect.
D) the substitution effect must be zero.

Answer 3

A

Question 4

Permanent income is

A) current income.
B) expected future income.
C) the average level of expected future income.
D) accumulated wealth.

Question 5

Generally speaking, wealth

A) starts out negative, turns positive, then approaches zero near the end of life.
B) starts out positive, turns negative, then turns positive again near the end of life.
C) starts out zero, turns positive, then turns negative near the end of life.
D) starts out negative, approaches zero, then turns negative again near the end of life.

Question 6

The income effect of a wage rate increase should lead to

A) an increase in the quantity of labor supplied and a decrease in leisure.
B) an increase in the quantity of labor supplied and an increase in leisure.
C) a decrease in quantity of labor supplied and an increase in leisure.
D) a decrease in the quantity of labor supplied and a decrease in leisure.

Question 7

The opportunity cost of leisure will rise if

A) the wage rate increases.
B) the wage rate decreases.
C) nonlabor income increases.
D) nonlabor income decreases.

Question 8

Households are said to have positive wealth when

A) the market value of their assets is zero.
B) the value of their assets is greater than the debts they owe.
C) the value of their assets is equal to the debts they owe.
D) the value of their assets is less than the debts they owe.

Question 9

If the income effect is equal to the substitution effect, the labor supply curve

A) is horizontal.
B) is vertical.
C) has a negative slope.
D) has a positive slope.

Question 10

According to the life-cycle theory of consumption, people tend to ________ during their main working years.

A) save
B) dissave
C) consume more than they earn
D) accumulate negative wealth

Question 11

The substitution effect of a wage rate increase suggests that

A) individuals will supply more work.
B) individuals will supply less work.
C) individuals will consume more leisure.
D) individuals will supply more work and consume more leisure.

Question 12

The path of consumption over a lifetime is likely to be ________ the path of income.

A) much more stable than
B) much less stable than
C) about the same as
D) completely unrelated to

Question 13

According to the life-cycle theory of consumption, people tend to consume ________ they earn during their main working years.

A) more than
B) less than
C) the same as
D) an amount unrelated to what

Question 14

According to the life-cycle theory of consumption, people tend to dissave during their ________ years.

A) main working
B) early
C) later
D) both B and C

Question 15

The idea of the ________ is that people make lifetime consumption plans.

A) life-cycle theory of consumption
B) invisible hand
C) law of demand
D) classical theory of investment

Question 16

A medical student is likely to consume more than a high school student because the

A) medical student bases consumption on current income while the high school student does not.
B) high school student bases consumption on permanent income while the medical student does not.
C) medical student's permanent income is likely higher than the high school student's permanent income.
D) medical student and the high school student both base consumption on current income.

Question 17

A change in tax rates is likely to affect individuals' behavior regarding consumption and saving if

A) the change is for one year only.
B) the change is not too big.
C) the change will not increase the budget deficit.
D) the change is permanent.

Question 18

If the income effect is greater than the substitution effect, the labor supply curve

A) is horizontal.
B) is vertical.
C) has a negative slope.
D) has a positive slope.

Question 19

The average level of one's expected future income stream is

A) disposable income.
B) permanent income.
C) gross income.
D) taxable income.

Question 20

If the income effect is less than the substitution effect and the wage rate increases, individuals

A) will supply more work.
B) will supply less work.
C) will consume more leisure.
D) cannot be determined from the given information

Question 21

Refer to the information provided in Table 15.1 below to answer the questions that follow.
Table 15.1
Refer to Table 15.1. From 2015 to 2016 the real wage

A) rises.
B) falls.
C) stays the same.
D) rises then falls.

Question 22

Holding everything else constant, the more wealth a household has,

A) the less it will consume, both now and in the future.
B) the more it will consume now, but the less it will consume in the future.
C) the less it will consume now, but the more it will consume in the future.
D) the more it will consume, both now and in the future.

Question 23

Which of the following is an example of nonlabor income?

A) proprietors' income
B) wages
C) inheritance
D) a month-pay bonus

Question 24

Caroline's hourly wage rate was reduced from $22 to $16. As a result of the wage decrease, Caroline desires to work more hours and take fewer hours of leisure. For Caroline

A) the income effect must be zero.
B) the substitution effect dominates the income effect.
C) the income effect dominates the substitution effect.
D) the substitution effect must equal the income effect.

Question 25

Refer to the information provided in Table 15.1 below to answer the questions that follow.
Table 15.1
Refer to Table 15.1. What is the real wage rate in 2015 using 2014 as the base year?

A) $7.14
B) $9.80
C) $10.00
D) $14.00

Question 26

When interest rates increase, the substitution effect suggests that individuals will

A) consume less today.
B) save less today.
C) consume less in the future.
D) save more and consume more today.

Question 27

An unexpected decrease in wealth or nonlabor income leads to

A) an uncertain effect on labor supply.
B) an increase in labor supply.
C) a decrease in labor supply.
D) a zero effect on labor supply.

Question 28

If the wage rate falls, consumption

A) rises because the income and substitution effects are working in opposite directions to change consumption.
B) falls because the income and substitution effects are both working in the same direction to decrease consumption.
C) rises because the income and substitution effects are both working in the same direction to increase consumption.
D) falls because the income and substitution effects are working in opposite directions to change consumption.

Question 29

The wage rate that is adjusted for changes in the price level over time is the

A) expected future wage rate.
B) nominal wage rate.
C) real wage rate.
D) money wage rate.

Question 30

Refer to the information provided in Table 15.1 below to answer the questions that follow.
Table 15.1
Refer to Table 15.1. From 2014 to 2016 nominal wages

A) rise.
B) fall.
C) stay the same.
D) rise then fall.

Question 31

An unexpected decrease in nonlabor income will have ________ effect on a household's consumption.

A) an uncertain
B) a negative
C) a positive
D) no

Question 32

Refer to the information provided in Table 15.1 below to answer the questions that follow.
Table 15.1
Refer to Table 15.1. What is the real wage rate in 2016 using 2014 as the base year?

A) $6.84
B) $8.86
C) $9.29
D) $13.30

Question 33

When the substitution effect is greater than the income effect, Juanita will not supply more work if

A) the wage rate and the price level increase proportionately.
B) the percentage increase in the price level is greater than the percentage change in wages.
C) wages are falling faster than prices.
D) all of the above

Question 34

A rise in the interest rate

A) decreases the opportunity cost of consuming today.
B) increases the opportunity cost of consuming in the future.
C) increases the opportunity cost of consuming today.
D) decreases the opportunity cost of consuming in the future.

Question 35

Refer to the information provided in Table 15.1 below to answer the questions that follow.
Table 15.1
Refer to Table 15.1. What is the real wage rate in 2014 using 2016 as the base year?

A) $6.00
B) $6.84
C) $11.40
D) $13.30

Question 36

Arnold's nominal wage increased by 3%, and the prices of goods that Arnold buys increased by 5%. Arnold's real wage has

A) increased.
B) remained constant.
C) decreased.
D) changed by 8%, but the direction of the change is ambiguous.

Question 37

Which of the following causes an individual to increase his/her supply of labor?

A) a decrease in the real wage
B) an increase in his/her wealth
C) a decrease in nonlabor income
D) Both A and C are correct.

Question 38

Empirical evidence with respect to the labor supply decision suggests that

A) the income effect seems to dominate for most people, which means that the aggregate labor supply responds negatively to an increase in the wage rate.
B) the substitution effect seems to dominate for most people, which means that the aggregate labor supply responds positively to an increase in the wage rate.
C) the substitution effect seems to dominate for most people, which means that the aggregate labor supply responds negatively to an increase in the wage rate.
D) the income effect seems to dominate for most people, which means that the aggregate labor supply responds positively to an increase in the wage rate.

Question 39

Refer to the information provided in Table 15.1 below to answer the questions that follow.
Table 15.1
Refer to Table 15.1. From 2014 to 2016 the real wage

A) rises.
B) falls.
C) stays the same.
D) rises then falls.

Question 40

Refer to the information provided in Table 15.1 below to answer the questions that follow.
Table 15.1
Refer to Table 15.1. What is the real wage rate in 2016 using 2015 as the base year?

A) $9.28
B) $9.58
C) $17.64
D) $19.00

Question 41

The unconstrained supply of labor refers to the amount a household ________ within a given period at the current wage rate if it could find the work.

A) would like to work
B) chooses not to work
C) is forced to work
D) actually works

Question 42

When your income decreases, which of the following items are you likely to postpone buying first?

A) health insurance
B) food
C) new iPhone
D) gas

Question 43

Which of the following factors is not one of the determinants of a household's budget constraint?

A) consumer's preferences
B) income
C) wealth
D) prices

Question 44

The highest labor-force participation rate is among

A) prime-age women.
B) prime-age men.
C) prime-age men and women.
D) non-prime-age men.

Question 45

An increase in consumption and a decrease in labor supply would result from

A) an increase in tax rates.
B) a decrease in transfer payments.
C) an increase in transfer payments.
D) a decrease in government spending.

Question 46

A decrease in transfer payments will result in

A) a decrease in both consumption and labor supply.
B) a decrease in consumption and an increase in labor supply.
C) an increase in consumption and a decrease in labor supply.
D) an increase in both consumption and labor supply.

Question 47

Assume households have positive wealth. If the income effect is greater than the substitution effect, a decrease in interest rates will

A) increase saving and decrease consumption spending by households.
B) decrease saving and increase consumption spending by households.
C) decrease both saving and consumption spending by households.
D) increase both saving and consumption spending by households.

Question 48

Assume that Brenda has positive wealth. As the interest rate decreased, Brenda reduced her current consumption. For Brenda,

A) the substitution effect of an interest rate decrease outweighs the income effect.
B) the income effect of an interest rate decrease outweighs the substitution effect.
C) the substitution effect of an interest rate increase must be zero.
D) the income effect of an interest rate decrease must equal the substitution effect.

Question 49

Assume that the substitution effect dominates the income effect. An increase in both consumption and labor supply would result from

A) a decrease in tax rates.
B) a decrease in transfer payments.
C) an increase in tax rates.
D) an increase in transfer payments.

Question 50

The ________ refers to the amount a household actually works within a given period at the current wage rate.

A) constrained supply of labor
B) labor-force participation rate
C) natural rate of unemployment
D) unconstrained supply of labor

Question 51

If an individual is a debtor,

A) the substitution effect of an interest rate increase is zero.
B) the income effect of an interest rate increase is zero.
C) the income and substitution effects of an increase in the interest rate work in the same direction.
D) the income and substitution effects of an increase in the interest rate work in opposite directions.

Question 52

Assume that households have positive wealth. Which of the following explains how the income effect of an interest rate increase affects consumption?

A) As the interest rate increases, the opportunity cost of current consumption falls, and therefore current consumption increases.
B) As the interest rate increases, permanent income increases and future consumption increases.
C) As the interest rate increases, expected future income increases and future consumption increases.
D) As the interest rate increases, nonlabor income increases and current consumption increases.

Question 53

At the beginning of 2017, Joey planned to buy a new iPhone, LCD TV, and motorcycle by borrowing money. Joey already owes $25,000 on other loans. He also planned to buy new clothing and DVDs out of current income. An increase in interest rates, during 2017, will most likely

A) cause Joey to decide to borrow less money, but not change what he planned to spend on goods purchased with current income.
B) cause Joey to decide to borrow more money and to spend more on goods purchased with current income.
C) cause Joey to decide to borrow more money, but not change what he planned to spend on goods purchased with current income.
D) cause Joey to decide to borrow less money and to spend less on goods purchased with current income.

Question 54

Empirical data suggest that during recessions, individuals reduce more of their consumption of

A) nondurable goods.
B) durable goods.
C) services.
D) necessities.

Question 55

Over time, spending on ________ is "smoother" than spending on ________.

A) durable goods; services
B) nondurable goods; durable goods
C) services; nondurable goods
D) durable goods; service

Question 56

The largest increase in the labor-force participation rate since 1970 is among

A) prime-age men.
B) teenagers over the age of 16.
C) prime-age women.
D) males in their 20s.

Question 57

Purchases of new houses are the most volatile type of expenditures because they are very sensitive to ________, which is highly volatile.

A) the interest rate
B) disposable income
C) the inflation rate
D) GDP

Question 58

If the substitution effect is greater than the income effect, a decrease in interest rates will

A) increase saving and decrease consumption spending by households.
B) decrease saving and increase consumption spending by households.
C) decrease both saving and consumption spending by households.
D) increase both saving and consumption spending by households.

Question 59

Assume that the substitution effect dominates the income effect. When the government raises tax rates, after-tax real wage rates

A) fall, consumption decreases, and labor supply increases.
B) fall, consumption decreases, and labor supply decreases.
C) rise, consumption increases, and labor supply increases.
D) fall, consumption increases, and labor supply decreases.

Question 60

Which of the following causes an increase in labor supply?

A) when wages and the price level increase proportionately
B) a decrease in income tax rates
C) a decrease in the general price level
D) a decrease in transfer payments

Question 61

Monetary policy is less effective than it was in the past because

A) investment has become less sensitive to interest rate changes.
B) the substitution effect of an interest rate change on consumption has increased.
C) the income effect of an interest rate change on consumption has increased.
D) the government deficit has decreased.

Question 62

Which of the following is true of a change in nonlabor income?

A) There is no substitution effect because a change in nonlabor income does not change the trade-off between work and leisure.
B) There is no income effect because a change in nonlabor income does not change the trade-off between work and leisure.
C) There is no substitution effect because a change in nonlabor income does not change a household's permanent income.
D) There is no income effect because a change in nonlabor income does not change a household's permanent income.

Question 63

Related to the Economics in Practice on p. 287: The Case-Shiller index of housing prices measures the change in price of

A) the average house in a city over time.
B) identical houses that have sold multiple times.
C) a specific size of house in an area over time.
D) the average house across the nation over a 1-year time period.

Question 64

The path of ________ over a lifetime is likely to be much more stable than the path of ________.

A) consumption; income
B) income; consumption
C) saving; consumption
D) saving; income

Question 65

A decrease in nonlabor income leads to ________ in consumption and ________ in labor supply.

A) a decrease; a decrease
B) a decrease; an increase
C) an increase; a decrease
D) an increase; an increase

Question 66

Generally speaking, ________ starts out negative, turns positive, then approaches zero near the end of life.

A) wealth
B) income
C) consumption
D) all of the above

Question 67

According to the life-cycle theory of consumption, people tend to save during their ________ years.

A) main working
B) early
C) later
D) both B and C

Question 68

An increase in dividend payments will

A) have no effect on labor supply.
B) lead to an increase in labor supply.
C) lead to a decrease in labor supply.
D) either lead to an increase or decrease in labor supply depending on the relative magnitude of the income and substitution effects.

Question 69

The smaller the percentage of people who work, the

A) higher the potential output per capita.
B) lower the potential output per capita.
C) higher the actual output per capita.
D) lower the actual output per capita.

Question 70

Which of the following is not a transfer payment?

A) Social Security payments
B) welfare benefits
C) unemployment compensation
D) dividends

Question 71

According to the life-cycle theory of consumption, people tend to ________ during their early and later years.

A) dissave
B) save
C) consume less than they earn
D) save less than they invest

Question 72

The average level of one's ________ income stream is permanent income.

A) current
B) expected future
C) known past
D) disposable

Question 73

According to the life-cycle theory of consumption, people tend to consume less than they ________ during their main working years.

A) earn
B) spend
C) desire
D) invest

Question 74

Households are said to have ________ wealth when the value of their assets is less than the debts they owe.

A) negative
B) positive
C) zero
D) undefinable

Question 75

Related to the Economics in Practice on p. 287: The Case-Shiller index of housing prices

A) increased by 125% from 1996 to 2006.
B) fell by 38% from 2006-2011.
C) showed an annual increase of over 7% in 2012 and early 2013.
D) All of the above are correct.

Question 76

Cash payments made by the government directly to households are

A) dividends.
B) transfer payments.
C) compensating differential payments.
D) national income payments.

Question 77

If a policy maker wants to change taxes to encourage individuals to increase their labor supply, the policy maker should

A) reduce taxes by a lump-sum amount.
B) increase taxes by a lump sum.
C) reduce the income tax rates that individuals pay.
D) increase the income tax rates that individuals pay.

Question 78

The portion of a corporation's profits that the firm pays out each period to shareholders is known as

A) capital gains.
B) dividends.
C) interest.
D) retained earnings.

Question 79

The idea of the life-cycle theory of consumption is that people make ________ consumption plans.

A) lifetime
B) yearly
C) seasonal
D) cyclical

Question 80

According to the life-cycle theory of consumption, people tend to consume more than they earn during their ________ years.

A) main working
B) early
C) later
D) both B and C