Question 1

If the consumer is a lender then

Accepted Answer

When the consumer is a lender, the consumption will be less than or equal to the income minus the taxes (c≤y−t). This is because the consumer is saving a portion of their income rather than spending it all on consumption. Therefore, option D is the correct answer. Option A is incorrect because it implies that the consumer is spending more than their income, which is not possible. Option B is not relevant as it describes the situation when the consumer is a borrower. Option C is incorrect because the consumer is assumed to be a lender, not a borrower. Option E is also not relevant as it describes the savings function, not the consumption function.

Question 2

We assume that the representative consumer's preferences exhibit the properties that

Accepted Answer

D

Question 3

A key variable in intertemporal choice is

Accepted Answer

The real interest rate is a key variable in intertemporal choice because it represents the opportunity cost of consuming now versus saving and consuming in the future. Higher real interest rates increase the incentive to save and reduce immediate consumption, while lower real interest rates do the opposite. Therefore, the real interest rate plays a crucial role in determining how individuals and firms allocate resources over time.

Question 4

If we represents a two-period consumer's lifetime wealth and r denotes the real rate of interest, the slope of the consumer's budget line is equal to

Accepted Answer

The slope of the consumer's budget line in a two-period model is given by the negative of the future value of current consumption, which is -(1 + r), where r is the real interest rate.

Question 5

The endowment point is the consumption bundle in which

Accepted Answer

The endowment point is where savings are zero because it represents the initial allocation of resources without any borrowing or lending.

Question 6

Consumption smoothing refers to

Accepted Answer

Consumption smoothing refers to the tendency of consumers to seek a consumption path over time that is smoother than income. This means that consumers try to balance their savings and consumption over a period of time to avoid sudden changes in their standard of living due to fluctuations in their income. By doing so, they can maintain a relatively stable level of consumption and avoid financial distress.

Question 7

If we represents a two-period consumer's lifetime wealth and r denotes the real rate of interest, the vertical (future consumption)intercept of the consumer's budget line is equal to

Accepted Answer

The vertical intercept of the consumer's budget line represents the amount of future consumption that the consumer can have if they save all of their current period income. Since the consumer's lifetime wealth is represented by we, the amount of future consumption they can have is we times the real interest rate (1+r), which is the future value of their savings. Therefore, the answer is B.

Question 8

In the two-period model of the economy,

Accepted Answer

In the two-period model of the economy, borrowing rates of interest are equal to lending rates of interest. This is because the model assumes perfect capital markets, where there are no transaction costs or information asymmetries that would cause different rates for borrowing and lending. Therefore, the interest rate is the same for both borrowing and lending.

Question 9

To ensure a well-defined solution to the consumers' intertemporal choice problems, we must assume that consumers' preferences exhibit the properties that

Accepted Answer

Consumers' preferences should exhibit that more is preferred to less (non-satiation) and that the consumer prefers diversity (convexity), ensuring well-defined intertemporal choices.

Question 10

A consumer's budget constraint in the current period is

Accepted Answer

The budget constraint for the current period is given by c + s = y - t. This equation states that the consumer's consumption expenditures (c) plus their savings (s) must equal their disposable income (y) minus any taxes (t) paid in the current period. Therefore, the best choice would be option E.

Question 11

The simplest device to analyze dynamic decisions is a

Accepted Answer

The answer of The simplest device to analyze dynamic decisions...

Question 12

A consumer's budget constraint in the future period is

Accepted Answer

The future period budget constraint is given by the equation c' = y' - t' + (1 + r)s, where c' is future consumption, y' is future income, t' is future taxes, r is the interest rate, and s is savings from the current period.

Question 13

Intertemporal decisions involve economic decisions

Accepted Answer

Intertemporal decisions involve tradeoffs between different time periods. This means that individuals or firms have to consider the costs and benefits of a decision not only in the present but also in the future. This requires an assessment of future consequences and uncertainty about future events. Examples of intertemporal decisions include decisions about saving, investment, borrowing, and consumption.

Question 14

The endowment point is the consumption bundle in which

Accepted Answer

The endowment point is where the consumer's consumption equals their disposable income in each period, meaning they neither save nor borrow.

Question 15

Consumption-savings decisions involve intertemporal choice as this is a decision involving a tradeoff between

Accepted Answer

Consumption-savings decisions involve choosing between current consumption and saving for future consumption. Therefore, the tradeoff is between current and future consumption, making option D the correct choice.

Question 16

For all bonds to be indistinguishable,

Accepted Answer

All consumers must never be expected to default on their debts because if there is a possibility of default, then the bonds will not be indistinguishable.

Question 17

Bonds are assumed to trade directly

Accepted Answer

Bonds are typically traded in the credit market, which is where debt securities are bought and sold.

Question 18

If we represents a two-period consumer's lifetime wealth and r denotes the real rate of interest, the horizontal (current consumption)intercept of the consumer's budget line is equal to

Accepted Answer

The answer of If we represents a two-period consumer's lifetime...

Question 19

A one-period bond is a promise to repay

Accepted Answer

The answer of A one-period bond is a promise to...

Question 20

The consumer's lifetime budget constraint states that

Accepted Answer

The consumer's lifetime budget constraint equates the present value of lifetime consumption to the present value of lifetime disposable income, which is income after taxes.

Quiz 9: A Two-Period Model: The Consumption–Savings Decision and Credit Markets

If the consumer is a lender then

We assume that the representative consumer's preferences exhibit the properties that

A key variable in intertemporal choice is

If we represents a two-period consumer's lifetime wealth and r denotes the real rate of interest, the slope of the consumer's budget line is equal to

The endowment point is the consumption bundle in which

Consumption smoothing refers to

If we represents a two-period consumer's lifetime wealth and r denotes the real rate of interest, the vertical (future consumption) intercept of the consumer's budget line is equal to

In the two-period model of the economy,

To ensure a well-defined solution to the consumers' intertemporal choice problems, we must assume that consumers' preferences exhibit the properties that

A consumer's budget constraint in the current period is

The simplest device to analyze dynamic decisions is a

A consumer's budget constraint in the future period is

Intertemporal decisions involve economic decisions

The endowment point is the consumption bundle in which

Consumption-savings decisions involve intertemporal choice as this is a decision involving a tradeoff between

For all bonds to be indistinguishable,

Bonds are assumed to trade directly

If we represents a two-period consumer's lifetime wealth and r denotes the real rate of interest, the horizontal (current consumption) intercept of the consumer's budget line is equal to

A one-period bond is a promise to repay

The consumer's lifetime budget constraint states that