Question 1

When the borrowing constraint is binding, ________.
A) wealth is zero
B) current consumption is lower than future consumption
C) future consumption is lower than current consumption
D) consumption smoothing is not possible

Accepted Answer

When the borrowing constraint is binding, individuals are not able to borrow to smooth consumption over time. This means that consumption smoothing is not possible, resulting in fluctuations in consumption and potentially lower future consumption. Therefore, choice D is the correct answer. Choices A, B, and C are not necessarily true when the borrowing constraint is binding.

Question 2

The Keynesian consumption function does not display consumption smoothing, because ________.
A) the average propensity to consume rises with income
B) the marginal propensity to consume is constant
C) consumption is not affected by the real interest rate
D) consumption is not affected by future income

Accepted Answer

The Keynesian consumption function assumes that consumption is mainly determined by current income and not future income, so there is no consumption smoothing.

Question 3

The value of the marginal propensity to consume is ________.
A) equal to one.
B) lies between zero and one.
C) is greater than one.
D) is less than zero.

Accepted Answer

The marginal propensity to consume (MPC) is the increase in consumer spending resulting from a one dollar increase in disposable income. It is generally believed to lie between zero and one, as people are likely to save some portion of their disposable income rather than spending it all. Therefore, the best choice is B.

Question 4

For many consumption activities -- skiing, for example -- the activity becomes more enjoyable as the consumer becomes more experienced. Assuming that "training consumption" is inexpensive relative to "proficient consumption," do such activities make it more or less likely that a borrowing constraint will be binding?

Accepted Answer

The answer of For many consumption activities -- skiing, for...

Question 5

When the borrowing constraint is binding, ________.
A) wealth is zero
B) C1 = Y1
C) C2 = Y2
D) current and future consumption are equal

Accepted Answer

The answer of When the borrowing constraint is binding, ________.
A)...

Question 6

According to the permanent income hypothesis, consumption spending depends largely on ________.
A) current income.
B) the savings rate.
C) a consumer's lifetime resources.
D) the level of current income plus the value of the assets owned by the household.

Accepted Answer

The permanent income hypothesis suggests that consumer spending is determined by a household's expected lifetime resources rather than just their current income. Therefore, choice C, which states that consumption spending depends largely on a consumer's lifetime resources, is the best answer.

Question 7

The Keynesian consumption function and the theory of intertemporal choice are consistent for households ________.
A) with a binding budget constraint
B) with little or no initial wealth
C) whose consumption remains positive, even if income is zero
D) whose consumption cannot exceed current income

Accepted Answer

The answer of The Keynesian consumption function and the theory...

Question 8

If households come to believe that permanent income has not changed ________.
A) the impact of a change in taxes on spending will be limited.
B) they will consume on the basis of their current income.
C) their life-cycle will be affected.
D) the impact of a given change in taxes on spending will be enhanced.

Accepted Answer

The permanent income hypothesis suggests that households base their consumption on their long-term income expectations rather than their current income. Therefore, if they believe their permanent income hasn't changed, a change in taxes will have a limited impact on their spending because they will adjust their savings rather than their consumption.

Question 9

The ratio of consumption to income is known as ________.
A) the average propensity to consume.
B) the borrowing constraint.
C) the marginal propensity to consume.
D) subprime accommodation.

Accepted Answer

The ratio of consumption to income is known as the average propensity to consume (APC). It is calculated by dividing total consumption by total disposable income.

Question 10

According to the permanent income hypothesis, permanent income is to ________ as transitory income is to ________.
A) consumption; saving
B) certain; hypothetical
C) wealth; gambling
D) saving; borrowing

Accepted Answer

Permanent income is the level of income that an individual expects to receive over the long run, whereas transitory income is the unexpected or temporary fluctuations in an individual's income. According to the permanent income hypothesis, an individual's consumption behavior is based more on their expected permanent income rather than their temporary transitory income, meaning that they are more likely to spend a larger portion of their permanent income and save a larger portion of their transitory income. Therefore, permanent income is to consumption as transitory income is to saving.

Question 11

During the 2007-2009 financial crisis, many households found themselves with negative wealth (debts to repay) and a binding borrowing constraint. Describe the income and substitution effects of a decrease in the real interest rate.

Accepted Answer

The answer of During the 2007-2009 financial crisis, many households...

Question 12

If high incomes inspire more saving than low incomes ________.
A) the average propensity to consume falls as income rises
B) the marginal propensity to consume rises as income rises
C) autonomous consumption falls as income rises
D) the average propensity to consume rises as wealth rises

Accepted Answer

The statement suggests that as incomes increase, people are more likely to save a higher percentage of their income, meaning that their average propensity to consume falls. This is consistent with the positive relationship between income and saving, as higher incomes provide more resources for individuals to allocate towards savings.

Question 13

In the Keynesian consumption function, if current income is equal to zero, consumption spending is equal to ________.
A) the marginal propensity to consume.
B) the average propensity to save.
C) autonomous consumption.
D) exogenous consumption.

Accepted Answer

When current income is equal to zero, individuals still have to spend money to meet their basic needs. This basic spending is called autonomous consumption, and it is the amount of consumption spending that individuals undertake regardless of their income level. Therefore, C is the correct answer. A and B are incorrect, as they refer to the marginal and average propensity to consume, which only come into play once income is above zero. D is also incorrect, as "exogenous consumption" is not a commonly used term in the Keynesian consumption function.

Question 14

The marginal propensity to consume describes ________.
A) the tendency to consume fringe, or unusual items.
B) the impact of a change in spending on income.
C) the impact on consumption resulting from a change in income.
D) lifetime consumption resources.

Accepted Answer

The marginal propensity to consume (MPC) describes the relationship between a change in income and a change in consumption. It measures the increase in consumer spending resulting from an increase in disposable income. Therefore, the correct option is C, which states that MPC describes the impact on consumption resulting from a change in income.

Question 15

The schedule describing the Keynesian consumption function will become steeper with an increase in ________.
A) consumption spending.
B) autonomous consumption.
C) the marginal propensity to consume.
D) the marginal propensity to save.

Accepted Answer

The marginal propensity to consume (MPC) determines the slope of the consumption function. A higher MPC means that for every additional dollar of income, there is a greater increase in consumption spending, resulting in a steeper consumption schedule.

Question 16

The permanent income hypothesis highlights the phenomenon of ________.
A) the intertemporal budget constraint
B) a binding borrowing constraint
C) autonomous consumption
D) consumption smoothing

Accepted Answer

The permanent income hypothesis emphasizes that individuals' consumption decisions are based on their expected permanent income rather than their current income. It assumes that people will try to smooth out their consumption over their entire lifetime, which is known as consumption smoothing.

Question 17

How might consumers for whom the borrowing constraint is binding benefit from access to relatively expensive forms of credit (e.g., pawn shops and "payday" loans)?

Accepted Answer

The answer of How might consumers for whom the borrowing...

Question 18

Use the intertemporal budget constraint -- equation (2) -- to explain how an increase in the real interest rate causes two distinct effects, an income effect and a substitution effect, and how those effects differ depending on whether the consumer is a saver or a borrower.

Accepted Answer

The answer of Use the intertemporal budget constraint -- equation...

Question 19

________ might cause the borrowing constraint to become non-binding, even though the consumer still cannot borrow.
A) an increase in future (expected) income
B) an increase in the real interest rate
C) a decrease in current income
D) a decrease in the real interest rate

Accepted Answer

The answer of ________ might cause the borrowing constraint to...

Question 20

Autonomous consumption is 700 and the marginal propensity to consume is 0.6. Calculate the average propensity to save when disposable income is (a) 10,000, (b) 12,000, and (c) 15,000.

Accepted Answer

The answer of Autonomous consumption is 700 and the marginal...

Quiz 18: Consumption and Saving

When the borrowing constraint is binding, ________.

The Keynesian consumption function does not display consumption smoothing, because ________.

The value of the marginal propensity to consume is ________.

When the borrowing constraint is binding, ________.

According to the permanent income hypothesis, consumption spending depends largely on ________.

The Keynesian consumption function and the theory of intertemporal choice are consistent for households ________.

If households come to believe that permanent income has not changed ________.

The ratio of consumption to income is known as ________.

According to the permanent income hypothesis, permanent income is to as transitory income is to .

During the 2007-2009 financial crisis, many households found themselves with negative wealth (debts to repay) and a binding borrowing constraint. Describe the income and substitution effects of a decrease in the real interest rate.

If high incomes inspire more saving than low incomes ________.

In the Keynesian consumption function, if current income is equal to zero, consumption spending is equal to ________.

The marginal propensity to consume describes ________.

The schedule describing the Keynesian consumption function will become steeper with an increase in ________.

The permanent income hypothesis highlights the phenomenon of ________.

How might consumers for whom the borrowing constraint is binding benefit from access to relatively expensive forms of credit (e.g., pawn shops and "payday" loans)?

Use the intertemporal budget constraint -- equation (2) -- to explain how an increase in the real interest rate causes two distinct effects, an income effect and a substitution effect, and how those effects differ depending on whether the consumer is a saver or a borrower.

________ might cause the borrowing constraint to become non-binding, even though the consumer still cannot borrow.

Autonomous consumption is 700 and the marginal propensity to consume is 0.6. Calculate the average propensity to save when disposable income is (a) 10,000, (b) 12,000, and (c) 15,000.