Question 1

Suppose we are working with the simplest possible Keynesian-cross multiplier,but with the permanent-income hypothesis figured in.If k = 0.88,and j = 0.25,the multiplier of a $1 change in government spending goes from ________ in the short run to ________ in the long run.

Accepted Answer

The answer of Suppose we are working with the simplest...

Question 2

By the permanent-income hypothesis,for every dollar that actual income increases,consumption expenditure rises in the short run by ________ dollars.

Accepted Answer

The answer of By the permanent-income hypothesis,for every dollar that...

Question 3

The permanent-income hypothesis can reconcile the cross-section and time-series consumption studies by incorporating the reasonable assumption that at any one time many people are rich because they are enjoying unusually high ________ income,causing them to have an unusually ________ saving ratio.

Accepted Answer

The permanent-income hypothesis argues that consumers base their consumption decisions on their permanent income rather than their transitory income. Therefore, at any one time, some individuals may experience transitory increases in income due to factors such as bonuses or windfalls. These individuals are likely to have a high saving ratio during this period, which could reconcile the cross-section and time-series consumption studies. Choice C correctly identifies these individuals as having transitory high income and a high saving ratio.

Question 4

The consumption theories proposed by Modigliani and Friedman suggest that during recessions consumers reduce

Accepted Answer

Modigliani's Life-Cycle Hypothesis and Friedman's Permanent Income Hypothesis both suggest that consumers attempt to smooth consumption over their lifetime. During recessions, they would reduce saving to maintain their consumption levels, rather than reducing consumption significantly.

Question 5

Suppose a person calculates his permanent income by adaptive expectations.Last year's permanent income was 54,000,this year's actual income is 44,000,j = 0.20,and k = 0.82.What is his consumption expenditure this year?

Accepted Answer

The answer of Suppose a person calculates his permanent income...

Question 6

Using consumption theories based upon forward looking hypothesis,a temporary increase in government expenditures will have ________ impact on induced consumption.

Accepted Answer

According to the forward-looking hypothesis, consumers base their current consumption decisions on expected future income rather than current income. A temporary increase in government expenditures is likely to be seen by individuals as a temporary increase in their future income, leading to a small multiple impact on induced consumption. This is because consumers will not significantly increase their spending unless they expect this increase in government expenditures to continue in the future.

Question 7

The life cycle hypothesis explains the long run constancy of the savings rate and short run variability of savings rate provided

Accepted Answer

Both factors are necessary to explain the constancy of the savings rate in the long run and the variability of the savings rate in the short run. The life cycle hypothesis assumes that individuals plan their savings over their lifetime based on their expected income and consumption needs. Therefore, changes in the proportions of working and retired people or changes in saving behavior across generations would affect the overall savings rate.

Question 8

The permanent-income hypothesis can reconcile the cross-section and time-series consumption studies by incorporating the reasonable assumption that at any one time many people are poor because they have ________ transitory income,causing them to have an unusually ________ saving ratio.

Accepted Answer

The answer of The permanent-income hypothesis can reconcile the cross-section...

Question 9

Both the permanent-income and life-cycle hypotheses make the assumption that people prefer a ________ consumption pattern in the long run,and so have a ________ short-run MPC out of sudden changes in income.

Accepted Answer

Both the permanent-income and life-cycle hypotheses assume that people prefer a smooth consumption pattern in the long run, which means their consumption changes slowly over time. Therefore, sudden changes in income will have a low short-run MPC as people are likely to save some of the additional income to smooth out their consumption over time.

Question 10

The savings rate ________ over the long run but ________ over the short run.

Accepted Answer

Friedman assumed that the savings rate is constant over the long run due to the permanent income hypothesis, but it can vary over the short run due to temporary changes in income.

Question 11

The hypothesis that people attempt to stabilize their consumption over their entire lifetime is the

Accepted Answer

The hypothesis that people attempt to stabilize their consumption over their entire lifetime is called the life cycle hypothesis. It suggests that individuals save during their high-income years to spend during their retirement or low-income years, thereby smoothing out their lifetime consumption pattern.

Question 12

By the permanent-income hypothesis,the long-run marginal propensity to consume is

Accepted Answer

The permanent-income hypothesis suggests that the long-run marginal propensity to consume is equal to the parameter k, which represents the proportion of permanent income that is consumed.

Question 13

Suppose a person calculates her permanent income by adaptive expectations.Last year's permanent income was 38,000,this year's actual income is 41,000,j = 0.30,and k = 0.86.What is her consumption expenditure this year?

Accepted Answer

The answer of Suppose a person calculates her permanent income...

Question 14

Both the PIH and the LCH predict that

Accepted Answer

Both the PIH and LCH predict that when actual income rises, there may be an upsurge in the purchases of consumer durables, which are counted as consumption expenditure, leading to an increase in total consumption as a fraction of income, which is option A. Additionally, they predict that the inclusion of consumer durables in consumption expenditure may lead to a fall in the saving ratio with higher income, as stated in option B. Therefore, both option A and B are correct, making the answer D.

Question 15

In the life-cycle hypothesis of consumption,two individuals with the same age,tastes,family composition,and income will

Accepted Answer

The life-cycle hypothesis states that consumption is determined by an individual's income over their lifetime, and that individuals will save during their working years in order to consume more during retirement. Therefore, if two individuals with the same characteristics have different levels of wealth, they will consume different amounts as their wealth influences their consumption decisions. So, option D is the correct choice.

Question 16

In a business cycle boom,we expect an unusually ________ proportion of actual income to be transitory,thus an unusually ________ MPC operating in the short run,which ________ the income multiplier for the short run.

Accepted Answer

In a business cycle boom, the income earned by individuals is likely to be higher than usual, but might not be sustained in the long run. Hence, the proportion of actual income that is transitory is high. This makes people spend less in the short run as they save some portion of the transitory income for the future, causing the MPC to be low. Consequently, the income multiplier reduces as a result of lower MPC. Therefore, the best answer is A.

Question 17

An individual having an unusually good year will be on his short-run consumption function at a point ________ his long-run consumption function,with an unusually ________ saving ratio.

Accepted Answer

The answer of An individual having an unusually good year...

Question 18

Replacing the simple Keynesian consumption function with the function based on the permanent-income hypothesis results in a ________ short-run multiplier,implying a ________ stable private economy.

Accepted Answer

The permanent-income hypothesis suggests that consumers base their spending on their expected long-term average income rather than their current income. This leads to a lower short-run multiplier because changes in income have a smaller effect on consumption. Consequently, the economy is more stable as it is less sensitive to short-term fluctuations in income.

Question 19

An individual having an unusually bad year will be on her short-run consumption function at a point ________ her long-run consumption function,with an unusually ________ saving ratio.

Accepted Answer

The answer of An individual having an unusually bad year...

Question 20

By the permanent-income hypothesis,the MPC of transitory income is

Accepted Answer

The permanent-income hypothesis argues that individuals consume based on their long-term/permanent income, rather than their short-term/transitory income. Therefore, their marginal propensity to consume (MPC) out of transitory income would be zero, as any changes in transitory income would not significantly affect their long-term consumption patterns.

Quiz 15: The Economics of Consumption Behavior

Suppose we are working with the simplest possible Keynesian-cross multiplier,but with the permanent-income hypothesis figured in.If k = 0.88,and j = 0.25,the multiplier of a $1 change in government spending goes from in the short run to in the long run.

By the permanent-income hypothesis,for every dollar that actual income increases,consumption expenditure rises in the short run by ________ dollars.

The permanent-income hypothesis can reconcile the cross-section and time-series consumption studies by incorporating the reasonable assumption that at any one time many people are rich because they are enjoying unusually high income,causing them to have an unusually saving ratio.

The consumption theories proposed by Modigliani and Friedman suggest that during recessions consumers reduce

Suppose a person calculates his permanent income by adaptive expectations.Last year's permanent income was 54,000,this year's actual income is 44,000,j = 0.20,and k = 0.82.What is his consumption expenditure this year?

Using consumption theories based upon forward looking hypothesis,a temporary increase in government expenditures will have ________ impact on induced consumption.

The life cycle hypothesis explains the long run constancy of the savings rate and short run variability of savings rate provided

The permanent-income hypothesis can reconcile the cross-section and time-series consumption studies by incorporating the reasonable assumption that at any one time many people are poor because they have transitory income,causing them to have an unusually saving ratio.

Both the permanent-income and life-cycle hypotheses make the assumption that people prefer a consumption pattern in the long run,and so have a short-run MPC out of sudden changes in income.

The savings rate over the long run but over the short run.

The hypothesis that people attempt to stabilize their consumption over their entire lifetime is the

By the permanent-income hypothesis,the long-run marginal propensity to consume is

Suppose a person calculates her permanent income by adaptive expectations.Last year's permanent income was 38,000,this year's actual income is 41,000,j = 0.30,and k = 0.86.What is her consumption expenditure this year?

Both the PIH and the LCH predict that

In the life-cycle hypothesis of consumption,two individuals with the same age,tastes,family composition,and income will

In a business cycle boom,we expect an unusually proportion of actual income to be transitory,thus an unusually MPC operating in the short run,which the income multiplier for the short run.

An individual having an unusually good year will be on his short-run consumption function at a point his long-run consumption function,with an unusually saving ratio.

Replacing the simple Keynesian consumption function with the function based on the permanent-income hypothesis results in a short-run multiplier,implying a stable private economy.

An individual having an unusually bad year will be on her short-run consumption function at a point her long-run consumption function,with an unusually saving ratio.

By the permanent-income hypothesis,the MPC of transitory income is