Question 1

Stewart Shopaholic,a compulsive shopper who likes to spend a lot of money all the time:

Accepted Answer

A high time preference means placing a greater value on immediate consumption over saving for future consumption. This behavior is consistent with compulsive shopping and an inability to delay gratification.

Question 2

Time preferences mean:

Accepted Answer

Time preferences refer to how individuals value consumption at different points in time. Discounting future consumption, individuals generally prefer to have goods sooner rather than later. This is reflected in the fact that interest rates are typically higher for borrowing in the short-term than in the long-term, as lenders require more compensation to defer their consumption. Option A is incorrect because not everyone prefers to have more free time, it depends on individual preferences and circumstances. Option B is incorrect because most people would prefer to have more free time than to work constantly. Option E is incorrect because it goes against the concept of time preferences, which assumes that people prefer present consumption over future consumption.

Question 3

A non-price determinant of the supply of loanable funds would be:

Accepted Answer

Household time preferences refer to the willingness of individuals to save or consume their income. A change in these preferences can affect the supply of loanable funds, as individuals may be more or less willing to save based on their time preferences. This is a non-price determinant because it is not directly related to the interest rate, which is a price that affects the supply and demand of loanable funds.

Question 4

If time preferences increase:

Accepted Answer

The answer of If time preferences increase:
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Question 5

Typically a college degree is "worth it," but it requires:

Accepted Answer

Pursuing a college degree requires low time preferences, as the investment in education pays off in the long run rather than immediate gratification. Smoothing consumption can also be important to manage finances while in school, but it is not the primary requirement for success in obtaining a degree. The supply of loanable funds can certainly make pursuing a degree more feasible, but it is not a necessary requirement.

Question 6

Your roommate arrives home and says,"I am so hungry,I would give up my iPhone for a bowl of chili right now." You say,"Here is the chili-let's trade." Based on this information:

Accepted Answer

A lower time preference means a willingness to delay gratification and wait for a greater benefit in the future. By trading the chili for the iPhone, you are demonstrating a lower time preference because you are willing to delay the gratification of having the iPhone in favor of immediate satisfaction by consuming the chili. Option C is incorrect because the willingness to accept a lower nominal interest rate can imply a higher time preference or a lower risk preference, depending on the individual's decision-making processes. Option D is not applicable as there is no lending or borrowing activity involved. Option E is also not applicable as there is no information to suggest any consumption smoothing behavior.

Question 7

Based on the relationship between consumption and income,someone in their "prime earning years":

Accepted Answer

During their prime earning years, individuals typically earn more than they spend, allowing them to save for future needs such as retirement.

Question 8

Most people have a time preference.Since this is true:

Accepted Answer

Time preference means that people value present consumption more than future consumption. Therefore, they need to be incentivized to save now in order to consume later. This incentive comes in the form of interest payments on savings. On the other hand, they are willing to pay interest to be able to consume now rather than later. Hence, choice B is the correct answer.

Question 9

Those with the least patience:

Accepted Answer

Time preference refers to the relative value placed on present versus future consumption. Those with the least patience have a higher time preference, preferring immediate consumption over waiting for future consumption. This means they will demand a higher nominal interest rate (compensation for waiting) but not necessarily a higher real rate (compensation for inflation and risk). They are also less likely to save and engage in consumption smoothing, as they prioritize immediate consumption over long-term planning.

Question 10

In a country,very old and very young people spend more than their incomes.Yet in that same country,the people who are middle-aged tend to save for retirement.If this scenario is true,it best describes:

Accepted Answer

This scenario best describes consumption smoothing, which is the concept of individuals trying to maintain a steady level of consumption over time despite fluctuations in their income. The very old and very young spend more than their incomes, while the middle-aged save for retirement when their incomes are higher, allowing them to maintain a consistent level of consumption throughout their lives. The other choices are not relevant to this scenario.

Question 11

When people withdraw funds from their savings,economists call this:

Accepted Answer

Economists call withdrawing funds from savings "dissaving". Dissaving refers to the usage of savings for consumption purposes, which is opposite to saving.

Question 12

Higher education:

Accepted Answer

Studies consistently show that individuals with higher levels of education tend to earn higher incomes throughout their lifetime. This is due to the fact that higher education often leads to increased skills, knowledge, and expertise, which in turn can lead to more advanced and high-paying job opportunities. Of course, there are always exceptions and variations based on occupation, geography, and other factors, but in general, higher education is seen as a valuable investment in one's future earning potential.

Question 13

If the demographics of a nation change and the average age of the nation is approaching middle age,we would expect:

Accepted Answer

The answer of If the demographics of a nation change...

Question 14

A young girl is saving money for a soccer ball but is tempted to buy a book.If the girl buys a book rather than continuing to save for the ball:

Accepted Answer

Choosing to buy a book rather than continuing to save for the soccer ball indicates that the girl has lowered her time preferences, meaning she is valuing present consumption (the book) over future consumption (the soccer ball). Therefore, she has exchanged low time preferences for high.

Question 15

If life expectancy falls due to AIDS and other diseases,we would expect:

Accepted Answer

The answer of If life expectancy falls due to AIDS...

Question 16

T.D.Goneworth,a financial services firm,makes people want their money and want it now.If the firm is successful in advertising this message and convinces people to believe it,then,all else equal:

Accepted Answer

If people want their money now, it indicates an increase in their time preference, meaning they prefer present consumption over future consumption.

Question 17

Assume an epidemic hits a nation hard.As a result,people now have lower life expectancies.The most likely result would be:

Accepted Answer

An epidemic that leads to lower life expectancies would result in a lower supply of loanable funds. This is because individuals who are sick or have died would not be able to save and accumulate funds, which would lead to a decrease in the supply of loanable funds.

Question 18

A young boy is saving money for a baseball bat but is tempted to buy an ice cream cone.If the boy successfully resists buying ice cream and continues to save for the bat:

Accepted Answer

By resisting the immediate gratification of buying ice cream, the boy is demonstrating a preference for future rewards over immediate ones, which is indicative of low time preference.

Question 19

The notion of consumption smoothing means:

Accepted Answer

Consumption smoothing refers to the tendency of individuals to maintain a stable level of consumption over their lifetime, borrowing when young, saving during middle age, and dissaving in retirement, resulting in consumption varying less than income.

Question 20

If foreign income and wealth decrease,this would most likely:

Accepted Answer

If foreign income and wealth decrease, they will have less money to invest or save, leading to a decrease in the supply of loanable funds in the global market. This will cause an increase in the interest rate, which will reduce the demand for loanable funds, as borrowing becomes more expensive. As a result, the supply of loanable funds will decrease. Therefore, choice C is the correct option.

Quiz 9: Savings, interest Rates, and the Market for Loanable Funds