Question 1

When examining the impact of changes in the interest rate on saving, which of the following is true?

Accepted Answer

All of the statements are true regarding the impact of changes in the interest rate on saving. Higher interest rates can make saving more attractive because individuals earn more on their savings. They also allow individuals to save less each year to reach a specific savings goal due to the higher amount of interest earned. Despite these logical implications, empirical evidence often shows that changes in interest rates do not significantly affect saving behavior, possibly due to other overriding factors such as income levels, consumption needs, or economic conditions.

Question 2

The Barro-Ricardo equivalence proposition implies that tax cuts

Accepted Answer

The Barro-Ricardo equivalence proposition argues that tax cuts that lead to higher budget deficits do not stimulate consumption as people anticipate future tax increases to repay the deficit. Therefore, the tax cut does not provide an economic stimulus, and the deficit persists or worsens.

Question 3

The proposition that financing debt by issuing bonds merely postpones taxation and is therefore in many instances equivalent to current taxation is known as the

Accepted Answer

The Barro-Ricardo equivalence proposition states that financing debt by issuing bonds only postpones taxation and is usually equivalent to current taxation. This idea implies that taxpayers will ultimately have to pay for government spending either in the present or in the future. Therefore, the correct answer is C) Barro-Ricardo equivalence proposition.

Question 4

Assume the government announces an income tax surcharge of 10% for next year only and the Fed announces that it will keep interest rates constant.What effect do you think this will have on the economy?

Accepted Answer

Households are likely to smooth their consumption over time, meaning they may not significantly alter their spending behavior in response to a temporary tax surcharge, especially if interest rates remain constant.

Question 5

If the interest rate increases,

Accepted Answer

The answer of If the interest rate increases,
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Question 6

There is empirical evidence for the fact that

Accepted Answer

The effects of interest rate changes on saving are indeed small and hard to determine. This is because the relationship between interest rates and saving behavior is complex, involving both substitution effects (where higher interest rates might encourage more saving because saving becomes more rewarding) and income effects (where higher interest rates might reduce the need to save for future income). Empirical studies often find mixed results, indicating that the impact of interest rate changes on saving behavior is not straightforward and can be influenced by a variety of factors.

Question 7

In the Fisher diagram, which gives a microeconomic explanation of why an increase in the rate of interest (i) can lead to either an increase or a decrease in current consumption, the budget constraint can be formulated as

Accepted Answer

The answer of In the Fisher diagram, which gives a...

Question 8

The Barro-Ricardo equivalence proposition relies on

Accepted Answer

The Barro-Ricardo equivalence proposition, also known as Ricardian equivalence, relies on the presence of an operational bequest motive (A) and the absence of liquidity constraints (B). This theory suggests that government debt and taxation are equivalent in their effect on the economy, assuming that individuals consider the future taxes implied by debt and adjust their savings accordingly.

Question 9

Any policy designed to increase business saving will most likely

Accepted Answer

National saving is the sum of private saving (which includes both personal and business saving) and public saving (government saving). If a policy increases business saving and personal saving decreases by less than this increase, the overall effect is an increase in national saving. This is because the total private saving would increase, contributing to a higher national saving, assuming government saving remains constant or is not negatively impacted to a degree that offsets the increase in private saving.

Question 10

The Barro-Ricardo equivalence proposition

Accepted Answer

The Barro-Ricardo equivalence proposition, also known as Ricardian equivalence, suggests that the method of government financing (taxation vs. debt) does not affect the total level of demand in the economy. This is because rational agents foresee that debt financing will lead to future taxation to pay off the debt, and thus they increase their savings to offset the future tax burden. This proposition relies on assumptions such as no liquidity constraints and the presence of a bequest motive. The events of the 1980s, where tax cuts led to increased deficits and a decline in private saving, are often cited as evidence against the practical applicability of Ricardian equivalence, highlighting the importance of real-world constraints and behaviors that may deviate from the model's assumptions.

Quiz 14: Consumption and saving