Question 1

What is the main argument which explains why the data do not show a positive relation between the deficit producing tax cuts in the early eighties savings rates?
A)People will increase savings to "finance" debt repayment by future generations.
B)People will increase consumption to "finance" debt repayment by future generations.
C)Savings is determined by uncertain events,the timing of future illnesses and death.
D)Savings is determined by certain events,the timing of future illnesses.

Accepted Answer

Savings is determined by uncertain events, the timing of future illnesses and death.

Question 2

The largest component of current consumption expenditure is ________,while the most volatile component is ________.
A)durable goods,nondurable goods
B)durable goods,services
C)services,durable goods
D)services,nondurable goods
E)nondurable goods,services

Accepted Answer

According to the Bureau of Economic Analysis, services make up the largest component of current consumption expenditure, accounting for about 65% of total spending. Nondurable goods are the most volatile component, as their demand can fluctuate rapidly based on changes in consumer preferences, prices, and economic conditions. However, the question asks for the most volatile component among the given options, and services would be less volatile than both nondurable goods and durable goods. Therefore, the correct answer is C, where services are the largest component and durable goods are the second largest but not the most volatile.

Question 3

Keynes' theory of consumption predicts that the aggregate saving rate
A)increases as society becomes richer.
B)falls as society becomes richer.
C)is constant in the long-run.
D)falls with higher incomes in a cross-section of income.

Accepted Answer

Keynes' theory of consumption, also known as the Absolute Income Hypothesis, suggests that as people's income increases, they will save a higher proportion of their income. This implies that the aggregate saving rate increases as society becomes richer.

Question 4

The higher the marginal propensity to consume,the
A)smaller will be the simple multiplier.
B)more insulated will be consumption spending from exogenous shocks to the economy.
C)less effective will be any given monetary or fiscal policy.
D)more unstable the economy will be.

Accepted Answer

A higher marginal propensity to consume means that consumers are likely to spend a larger portion of any additional income they receive. This can lead to greater fluctuations in economic activity, making the economy more unstable in response to changes in income or economic conditions.

Question 5

The ________ nature of consumer durables expenditures ________ a significant drop in the personal-saving-and-consumer-durables-expenditure ratio in a recession.
A)procyclical,helps produce
B)procyclical,prevents
C)countercyclical,helps produce
D)countercyclical,prevents

Accepted Answer

The procyclical nature of consumer durables expenditures means that these expenditures tend to increase during economic expansions and decrease during recessions. This behavior helps produce a significant drop in the personal-saving-and-consumer-durables-expenditure ratio during a recession, as people spend less on durable goods and may save more.

Question 6

Keynes was concerned about an implication of his consumption theory: that as an economy becomes more prosperous,its saving rate becomes too ________ to sustain that prosperity.Such a long-term trend in the U.S.saving rate is ________ in the time-series data.
A)large,found
B)large,not found
C)small,found
D)small,not found

Accepted Answer

Keynes was concerned that as an economy becomes more prosperous, the saving rate would become too large to sustain that prosperity. This trend is not found in the time-series data, as the U.S. saving rate has not consistently increased with economic prosperity.

Question 7

Suppose an individual were to win $1,000 in Las Vegas.The permanent-income hypothesis predicts that the individual would NOT be likely to
A)put his winnings in the bank.
B)throw a party.
C)buy a dishwasher.
D)purchase some shares in a corporation.

Accepted Answer

According to the permanent income hypothesis, people make consumption decisions based on their expected long-term income rather than their current income. Therefore, winning $1,000 in Las Vegas would not change their consumption habits in a significant way, and they would not be likely to throw a party or increase their spending on non-essential items. Instead, they would be more likely to save the money by putting it in the bank or investing it in something like shares in a corporation.

Question 8

During the 1990s the household savings rate in the United States as measured by NIPA
A)increased dramatically from two percent to almost six percent.
B)fell sharply and was only 0.7% by the year 2004.
C)increased only slightly because the federal budget deficit was finally eliminated.
D)fell to two percent when a federal budget surplus appeared.

Accepted Answer

The correct answer is B as the household savings rate fell sharply during the 1990s and was only 0.7% by the year 2004, indicating that households were not saving as much during this period. This was likely due to factors such as increased consumer spending and a culture of immediate gratification. The other answer choices are incorrect as they do not reflect the actual trend of household savings during the 1990s.

Question 9

The Keynesian consumption function implies that at a given moment persons with high incomes are saving ________ persons with low incomes,a prediction which is ________ by actual cross-section consumption data.
A)a lower fraction of income than,confirmed
B)a lower fraction of income than,not confirmed
C)a higher fraction of income than,confirmed
D)a higher fraction of income than,not confirmed
E)the same fraction of income as,confirmed

Accepted Answer

The Keynesian consumption function suggests that as income increases, the proportion of income saved increases. This is because as people earn more, they can afford to save more after meeting their consumption needs. This prediction is confirmed by actual cross-section consumption data, which generally shows that higher-income individuals save a higher fraction of their income compared to lower-income individuals.

Question 10

The change in the savings rate during the 1990s is NOT consistent with
A)Friedman's permanent-income hypothesis.
B)Modigliani's life cycle hypothesis.
C)the boom in the stock market.
D)All of the above.

Accepted Answer

The answer of The change in the savings rate during...

Question 11

What is the main argument which explains why an increased public deficit financed tax cut may not result in increased consumption?
A)People will increase savings to "finance" debt repayment by future generations.
B)People will increase consumption to "finance" debt repayment by future generations.
C)Savings is determined by uncertain events,the timing of future illnesses and death.
D)Savings is determined by certain events,the timing of future illnesses and death.

Accepted Answer

The answer of What is the main argument which explains...

Question 12

In the simple Keynesian consumption function,consumption demand is
A)a function of disposable income alone.
B)a function of disposable income and an autonomous component.
C)simply an autonomous amount exogenous to the model.
D)a function of the interest rate and an autonomous component.
E)a function of the interest rate alone.

Accepted Answer

The simple Keynesian consumption function includes an autonomous component (such as government spending or business investment) as well as a function of disposable income. This implies that consumption demand is not solely determined by disposable income, but also by other factors outside of the individual's control.

Question 13

The largest component of total spending is
A)private investment,the capital consumption allowance.
B)government spending on public goods.
C)private consumption on durable and non-durable goods.
D)public consumption of non-durable goods.

Accepted Answer

Private consumption on durable and non-durable goods is the largest component of total spending, as it includes all consumption by households on goods that are used for personal use or consumption. This category includes expenditures on food, housing, clothing, and other necessities, as well as on non-essential items such as entertainment, travel, and luxuries. Private investment and government spending on public goods are also important components of total spending, but they are typically smaller in magnitude than private consumption. Public consumption of non-durable goods is not a significant component of total spending, as it represents only a small fraction of total expenditures.

Question 14

The least volatile component of current consumption expenditure is ________,and the changes in its relative importance help explain why the volatility of overall consumption has ________ since the 1950s.
A)nondurable goods,risen
B)nondurable goods,fallen
C)durable goods,stayed the same
D)durable goods,fallen
E)services,stayed the same

Accepted Answer

Services are the least volatile component of current consumption expenditure, and their relative importance has increased since the 1950s. This shift towards a larger share of consumption being spent on services has contributed to the decreased volatility of overall consumption.

Question 15

The consensus is that approximately ________ percent of U.S.households are subject to a liquidity constraint in consumption.
A)75
B)55
C)35
D)15
E)5

Accepted Answer

The answer of The consensus is that approximately ________ percent...

Question 16

A young college graduate is earning $30,000 per year and would like to borrow $20,000 more for a down payment on a house,but is prevented from doing so by a "liquidity constraint." For her,transitory income is likely to be ________ in its entirety,producing an MPC out of transitory income ________ that predicted by the LCH.
A)consumed,below
B)consumed,above
C)saved,below
D)saved,above

Accepted Answer

The liquidity constraint prevents the individual from borrowing against future income, leading to a higher marginal propensity to consume (MPC) out of transitory income than predicted by the Life-Cycle Hypothesis (LCH), as the individual is likely to consume a significant portion of any transitory income due to the inability to borrow.

Question 17

Of the three major categories of consumption,________ is the most volatile because their purchase ________.
A)services;is sensitive to income levels
B)nondurables;is sensitive to income levels
C)durables;can be postponed when incomes decline
D)durables;they are necessities

Accepted Answer

Durables can be postponed when incomes decline, making their purchase more volatile. Services are less affected by changes in income levels, and nondurables are considered necessities and are also less sensitive to income levels.

Question 18

Figure 15-1
 
-Figure 15-1 above displays the consumption pattern over the lifetime of an individual.Saving and asset accumulation occur during the years ________ according to ________ theory of consumption.
A)R to L;Keynes'
B)R to L;Modigliani's
C)O to R;Friedman's
D)O to R;Modigliani's

Accepted Answer

The consumption pattern in Figure 15-1 starts low in the early years (O) and increases gradually throughout the individual's lifetime (R). This is consistent with Modigliani's life-cycle theory of consumption, which states that individuals tend to save more in their early years to accumulate assets and then consume those assets later in life. Therefore, option D, "O to R;Modigliani's" is the best choice.

Question 19

A central tenet of the position against policy activism is that
A)consumption spending is highly unstable.
B)consumption spending is highly stable.
C)aggregate policies have little effect on consumption.
D)instability in private consumption will always be offset by variations in other elements of private spending.

Accepted Answer

The central tenet of the position against policy activism is that consumption spending is highly stable. This means that changes in aggregate policies will have little effect on consumption as it is not easily influenced or affected by external factors.

Question 20

Which of the following is NOT usually assumed about the effect of disposable income on aggregate consumer spending?
A)Consumer spending is at a higher level of disposable income.
B)At low levels of disposable income,saving may be negative.
C)Consumption is always less than disposable income.
D)A rise in income leads to a less than proportionate rise in consumption.

Accepted Answer

Consumption can be equal to or greater than disposable income, depending on whether individuals choose to save or borrow. However, it is unlikely to always be less than disposable income. The other options are commonly assumed in the relationship between disposable income and consumer spending.

Quiz 15: The Economics of Consumption Behavior

What is the main argument which explains why the data do not show a positive relation between the deficit producing tax cuts in the early eighties savings rates?

The largest component of current consumption expenditure is ,while the most volatile component is .

Keynes' theory of consumption predicts that the aggregate saving rate

The higher the marginal propensity to consume,the

The nature of consumer durables expenditures a significant drop in the personal-saving-and-consumer-durables-expenditure ratio in a recession.

Keynes was concerned about an implication of his consumption theory: that as an economy becomes more prosperous,its saving rate becomes too to sustain that prosperity.Such a long-term trend in the U.S.saving rate is in the time-series data.

Suppose an individual were to win $1,000 in Las Vegas.The permanent-income hypothesis predicts that the individual would NOT be likely to

During the 1990s the household savings rate in the United States as measured by NIPA

The Keynesian consumption function implies that at a given moment persons with high incomes are saving persons with low incomes,a prediction which is by actual cross-section consumption data.

The change in the savings rate during the 1990s is NOT consistent with

What is the main argument which explains why an increased public deficit financed tax cut may not result in increased consumption?

In the simple Keynesian consumption function,consumption demand is

The largest component of total spending is

The least volatile component of current consumption expenditure is ,and the changes in its relative importance help explain why the volatility of overall consumption has since the 1950s.

The consensus is that approximately ________ percent of U.S.households are subject to a liquidity constraint in consumption.

Of the three major categories of consumption, is the most volatile because their purchase .

Figure 15-1 -Figure 15-1 above displays the consumption pattern over the lifetime of an individual.Saving and asset accumulation occur during the years according to theory of consumption.

A central tenet of the position against policy activism is that

Which of the following is NOT usually assumed about the effect of disposable income on aggregate consumer spending?