Question 1

We limit ourselves to two periods in the intertemporal model of the business cycle because

Accepted Answer

The intertemporal model emphasizes the trade-off between consumption in the present versus consumption in the future. Two periods (present and future) are sufficient to capture this trade-off, making option C the correct choice. Options A and B are not relevant to the reason for limiting the periods, and option D is incorrect as there is no requirement for an even number of periods.

Question 2

Savings in our model are

Accepted Answer

Savings refer to postponed consumption, as individuals or households hold back some of their income to be used at a later time. Savings are not considered durable or non-durable consumption goods, nor are they necessarily in the form of money.

Question 3

At the endowment point,we have the property that

Accepted Answer

At the endowment point, the consumer's budget constraint is given by y = c + t. This implies that c = y - t, since we assume that all income is either spent on consumption or paid in taxes. Therefore, choice (B) is the correct answer. Choices (A), (C), and (D) do not necessarily hold at the endowment point.

Question 4

We collapse the consumer's current-period and future-period budget constraints into a single lifetime budget constraint by

Accepted Answer

By substituting for savings, we can combine the current and future budget constraints into a single lifetime budget constraint. This is achieved by rearranging the future budget constraint to highlight the amount of assets or savings that the consumer will have in the next period, and then substituting this into the current budget constraint. This allows us to consider the consumer's consumption and savings decisions over their entire lifetime, rather than just in the current period or future periods separately.

Question 5

The endowment point is the consumption bundle in which

Accepted Answer

The endowment point is where the consumer consumes exactly what they have without saving or borrowing, meaning no savings occur.

Question 6

Intertemporal decisions involve economic decisions

Accepted Answer

Intertemporal decisions involve choices made across different time periods and often involve trade-offs between present and future benefits or costs.

Question 7

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 budget line represents the opportunity cost of consuming one unit of present consumption in terms of future consumption. Since the real rate of interest represents the opportunity cost of consuming today in terms of tomorrow, the slope of the budget line is equal to -(1+r).

Question 8

The endowment point is the consumption bundle in which

Accepted Answer

The endowment point is where the consumer's consumption in each period equals their disposable income, meaning they are not saving or borrowing.

Question 9

A one-period bond is a promise to repay

Accepted Answer

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

Question 10

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 11

We use a two-period model because

Accepted Answer

A two-period model is often used because it is the simplest form of a dynamic model, allowing for analysis of intertemporal choices without unnecessary complexity.

Question 12

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 budget line represents the consumer's wealth at the end of the second period, which is equal to their lifetime wealth (we) multiplied by the future value factor of (1+r) for one period (since there are two periods in total). Therefore, the vertical intercept should be (1 + r)we.

Question 13

The simplest device to analyze dynamic decisions is a

Accepted Answer

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

Question 14

The desire to smooth consumption is reflected in

Accepted Answer

The curvature in a consumer's indifference curves reflects the desire to smooth consumption.

Question 15

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.

Question 16

In the basic two-period model,

Accepted Answer

The answer of In the basic two-period model,
...

Question 17

Lifetime wealth is

Accepted Answer

Lifetime wealth is the present value of disposable income, which includes current and future income minus taxes, all adjusted for the time value of money.

Question 18

Why don't consumers work in the two-period model?

Accepted Answer

The assumption that consumers do not work in the two-period model is a simplifying assumption that allows economists to focus on the consumption and savings decisions of households without having to model the labor market. This simplification has proven to be a useful analytical tool for understanding how consumers make intertemporal decisions about consumption and savings.

Question 19

Consumption smoothing refers to

Accepted Answer

Consumption smoothing refers to the behavior of consumers who try to maintain a stable pattern of consumption over time by adjusting how much they save or borrow. This means that even if their income fluctuates, they will smooth out their consumption to avoid sharp changes in their standard of living. Therefore, choice (B) is the correct answer. Choices (A), (C), and (D) are not accurate definitions of consumption smoothing.

Question 20

The endowment point is the consumption bundle in which

Accepted Answer

The endowment point refers to the consumption bundle that a household would choose if they did not save any money. Therefore, at the endowment point, savings are zero.

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

We limit ourselves to two periods in the intertemporal model of the business cycle because

Savings in our model are

At the endowment point,we have the property that

We collapse the consumer's current-period and future-period budget constraints into a single lifetime budget constraint by

The endowment point is the consumption bundle in which

Intertemporal decisions involve economic decisions

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

A one-period bond is a promise to repay

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

We use a two-period model because

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

The simplest device to analyze dynamic decisions is a

The desire to smooth consumption is reflected in

The consumer's lifetime budget constraint states that

In the basic two-period model,

Lifetime wealth is

Why don't consumers work in the two-period model?

Consumption smoothing refers to

The endowment point is the consumption bundle in which