Question 1

According to the life-cycle hypothesis, as people grow older ________.
A) their wealth grows before and after retirement.
B) their wealth declines before and after retirement.
C) their wealth grows before retirement, then declines after retirement.
D) their wealth falls before retirement, then rises after retirement.

Accepted Answer

According to the life-cycle hypothesis, people accumulate wealth during their working years and then spend it down during their retirement years. Therefore, their wealth typically grows before retirement and declines after retirement.

Question 2

In the permanent income hypothesis, income is divided into ________.
A) current and future income.
B) future and transitory income.
C) transitory and permanent income.
D) permanent and current income.

Accepted Answer

The permanent income hypothesis divides income into two categories: transitory income, which is short-term and unpredictable, and permanent income, which is long-term and stable. Therefore, choice C is the correct answer.

Question 3

The theory of intertemporal choice, and the life-cycle and permanent income hypotheses have in common the assumption that ________.
A) consumption decisions are affected by current expectations about lifetime resources
B) consumption decisions are based on all available information
C) current income, rather than expected income, has the greater influence on consumption decisions
D) decisions to borrow and save are influenced much more by immediate circumstances than by long-term consequences

Accepted Answer

The theory of intertemporal choice, life-cycle hypothesis, and permanent income hypothesis all assume that consumption decisions are affected by current expectations about lifetime resources. These theories recognize that individuals make choices regarding consumption and savings based on their expectations of future income and wealth.

Question 4

In 2008, the wealth of U.S. households fell by ________.
A) $11 million.
B) $11 billion.
C) $11 trillion.
D) $11 gajillion.

Accepted Answer

The wealth of U.S. households fell by $11 trillion in 2008 during the financial crisis. A and B are too low and D is not a real number.

Question 5

The idea that consumers will not consistently discount the future over time is known as ________.
A) intertemporal choice.
B) tertiary inversion.
C) hyperbolic discounting.
D) antediluvian Machiavellianism.

Accepted Answer

The idea that consumers will not consistently discount the future over time is known as hyperbolic discounting. This means that people tend to value immediate rewards or costs more heavily than those that are further in the future, leading to inconsistent decision-making over time. A, B, and D are not correct or relevant in this context.

Question 6

According to the permanent income hypothesis, the impact of ________.
A) a change in permanent income on consumption is greater than the impact resulting from a change in transitory income.
B) a change in transitory income on consumption is greater than the impact resulting from a change in permanent income.
C) a change in transitory income is felt primarily through changes in the total tax revenue paid to the federal government.
D) a change in permanent income on consumption is larger than the impact resulting from a change in future income.

Accepted Answer

The permanent income hypothesis suggests that consumption is determined by a household's expected income over the long-term or permanent income, rather than changes in temporary or transitory income. Therefore, a change in permanent income would have a greater impact on consumption compared to a change in transitory income.

Question 7

Current estimates of the marginal propensity to consume out of wealth are in the neighborhood of ________.
A) three and one-half cents per dollar of wealth.
B) 45 cents per dollar of wealth.
C) 98 cents per dollar of wealth.
D) $4.87 per dollar of wealth.

Accepted Answer

The current estimates of the marginal propensity to consume out of wealth are in the range of 2-4 cents per dollar of wealth. Option A is the closest to this range. Option B and C are too high, while option D is too unrealistic.

Question 8

The effect of the February 2008 tax rebate on spending was reduced due to ________.
A) the simultaneous missteps in monetary policy.
B) the negative impact of the policy on saving rates.
C) the recognition that the rebate did not constitute a permanent change in income.
D) the small size of the program.

Accepted Answer

The effect of the tax rebate was reduced because consumers recognized that it was a one-time change in income and not a permanent increase in their income. Therefore, they were less likely to increase their spending based on a temporary windfall.

Question 9

The life-cycle hypothesis applies the concept of ________ to retirement.
A) income & substitution effects
B) transitory income
C) autonomous consumption
D) consumption smoothing

Accepted Answer

The life-cycle hypothesis is a theoretical framework that suggests individuals smooth their consumption throughout their lifetime. This is achieved by saving and investing during working years and subsequently drawing down on those savings during retirement. Therefore, the concept of consumption smoothing is directly related to retirement within this hypothesis. The other options (A, B, and C) are related concepts but not specifically related to retirement in the life-cycle hypothesis.

Question 10

Advances in medical practice have increased both expected lifespans and medical expenditures. What does the life-cycle hypothesis predict as the macroeconomic consequences?

Accepted Answer

The answer of Advances in medical practice have increased both...

Question 11

Intertemporal choice theory is more consistent with ________.
A) Keynesian theory than the permanent income hypothesis of Friedman.
B) the permanent income hypothesis than Keynesian theory.
C) Keynesian theory than the life-cycle hypothesis.
D) Keynesian theory than the Gini coefficient theory.

Accepted Answer

Intertemporal choice theory emphasizes the importance of saving and investment decisions based on future income expectations. The permanent income hypothesis of Friedman also focuses on consumption and saving habits based on expected income over the long term, making it more consistent with intertemporal choice theory. Keyensian theory, on the other hand, places more emphasis on short-term consumption and government intervention in the economy, making it less consistent with intertemporal choice theory.

Question 12

The observation that changes in an economic variable are unpredictable suggests that the relevant variable follows ________.
A) a random walk.
B) tertiary unpredictability.
C) the life-cycle hypothesis.
D) the Tequila effect.

Accepted Answer

A random walk is a mathematical model used to describe stocks or other unpredictable factors. It suggests that future changes in the variable are not dependent on past changes and are random in nature.

Question 13

The life-cycle hypothesis predicts what consequence of aging of the overall population? [That is, an increase in T, relative to R & L.]
A) a decrease in the marginal propensity to consume out of wealth
B) an increase in aggregate saving
C) a decrease in the marginal propensity to consume out of income
D) an increase in aggregate wealth

Accepted Answer

The answer of The life-cycle hypothesis predicts what consequence of...

Question 14

During the 2007-2009 financial crisis, many households found themselves with debts to repay. How might this explain the consumer response to the 2008 Tax Rebate?

Accepted Answer

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

Question 15

Suppose consumers anticipate that their wealth will grow over time, because of interest earnings and capital gains. According to the life-cycle hypothesis, such optimism should cause current consumption to be ________.
A) relatively low
B) relatively insensitive to changes in income
C) rising as individuals near retirement age
D) relatively high

Accepted Answer

According to the life-cycle hypothesis, consumer spending is based on their anticipated lifetime income and wealth, not just their current income. If consumers expect that their wealth will grow over time, they may be more willing to spend money now, leading to relatively high current consumption.

Question 16

In the permanent income hypothesis, income that does not persist for a long period of time is known as ________.
A) current income.
B) transitory income.
C) insufficient income.
D) limited income.

Accepted Answer

According to the permanent income hypothesis, transitory income refers to income that does not persist for a long period of time and is subject to temporary fluctuations. Current income refers to income received in the current period, which may or may not be transitory. Insufficient income and limited income are not terms commonly used in the permanent income hypothesis.

Question 17

The recession of 2008-2009 demonstrated that ________.
A) consumption is especially sensitive to changes in the retirement age
B) changes in wealth can be a major source of fluctuations in consumption
C) as consumers get older, they tend to exhaust all their savings
D) permanent income is something of a misnomer

Accepted Answer

The recession of 2008-2009 showed that changes in wealth, such as a decrease in home values or stock prices, can have a significant impact on consumption patterns. This demonstrates the importance of wealth effects on consumption behavior. A, C, and D are not relevant to the recession of 2008-2009.

Question 18

According to rational expectations, expectations will only change in the event that ________.
A) wealth changes.
B) current income changes.
C) permanent income changes.
D) unanticipated new information arises.

Accepted Answer

Rational expectations theory posits that individuals form expectations about future events based on all available information including past experience and current knowledge. In order for expectations to change under this theory, new information that was not previously anticipated must arise. Choices A, B, and C all relate to changes in economic factors that could potentially affect expectations, but they do not necessarily guarantee a change in expectations. Only new, unanticipated information would require a revision to rational expectations.

Question 19

According to the life-cycle hypothesis, as consumers get older ________.
A) the marginal propensity to consume out of wealth and income rise.
B) the marginal propensity to consume out of wealth falls and the marginal propensity to consume out of income rises.
C) the marginal propensity to consume out of wealth rises and the marginal propensity to consume out of income falls.
D) the marginal propensity to consume out of wealth and income fall.

Accepted Answer

The life-cycle hypothesis suggests that as consumers age, they tend to save more and consume less out of their current income, leading to a rise in the marginal propensity to consume out of wealth (as they draw down savings) and a fall in the marginal propensity to consume out of income (as they prioritize saving for retirement).

Question 20

According to the life-cycle hypothesis ________.
A) households consume on the basis of their current income and liabilities.
B) household consumption as a percentage of income varies over one's lifetime.
C) current income is a function of future income.
D) cycling to work everyday allows one to live a longer life.

Accepted Answer

The life-cycle hypothesis suggests that household consumption as a percentage of income varies over an individual's lifetime. This is because spending patterns change throughout one's life, with higher spending occurring during the working years and lower spending in retirement. The hypothesis does not state that current income is necessarily a function of future income or that cycling to work everyday leads to a longer life.

Quiz 18: Consumption and Saving

According to the life-cycle hypothesis, as people grow older ________.

In the permanent income hypothesis, income is divided into ________.

The theory of intertemporal choice, and the life-cycle and permanent income hypotheses have in common the assumption that ________.

In 2008, the wealth of U.S. households fell by ________.

The idea that consumers will not consistently discount the future over time is known as ________.

According to the permanent income hypothesis, the impact of ________.

Current estimates of the marginal propensity to consume out of wealth are in the neighborhood of ________.

The effect of the February 2008 tax rebate on spending was reduced due to ________.

The life-cycle hypothesis applies the concept of ________ to retirement.

Advances in medical practice have increased both expected lifespans and medical expenditures. What does the life-cycle hypothesis predict as the macroeconomic consequences?

Intertemporal choice theory is more consistent with ________.

The observation that changes in an economic variable are unpredictable suggests that the relevant variable follows ________.

The life-cycle hypothesis predicts what consequence of aging of the overall population? [That is, an increase in T, relative to R & L.]

During the 2007-2009 financial crisis, many households found themselves with debts to repay. How might this explain the consumer response to the 2008 Tax Rebate?

Suppose consumers anticipate that their wealth will grow over time, because of interest earnings and capital gains. According to the life-cycle hypothesis, such optimism should cause current consumption to be ________.

In the permanent income hypothesis, income that does not persist for a long period of time is known as ________.

The recession of 2008-2009 demonstrated that ________.

According to rational expectations, expectations will only change in the event that ________.

According to the life-cycle hypothesis, as consumers get older ________.

According to the life-cycle hypothesis ________.