Question 1

If an investor has a tax rate on interest income of 30% and the inflation rate is 4%,which bond has the highest expected after-tax real interest rate?
A)A Treasury bond paying 8%
B)A corporate bond paying 7%
C)A Treasury bond paying 7%
D)A municipal bond paying 6%

Accepted Answer

Municipal bonds are typically exempt from federal taxes, so the after-tax interest rate is 6%. The real interest rate is calculated by subtracting the inflation rate (4%) from the nominal rate, resulting in a 2% real interest rate for the municipal bond. Other bonds have lower after-tax real rates due to the tax on interest income.

Question 2

If an investor has a tax rate on interest income of 25% and the inflation rate is 4%,which bond has the lowest expected after-tax real interest rate?
A)A Treasury bond paying 9%
B)A corporate bond paying 8%
C)A Treasury bond paying 7%
D)A municipal bond paying 6%

Accepted Answer

The after-tax nominal interest rate for each bond is calculated by subtracting the tax from the nominal rate, except for municipal bonds which are typically tax-exempt. The real interest rate is then found by subtracting the inflation rate. The Treasury bond paying 7% has the lowest after-tax real interest rate after these calculations.

Question 3

Desired national saving equals
A) 
B) 
C) 
D)

Accepted Answer

The desired national saving is not given and cannot be determined from the information provided. Therefore, none of the answer choices can be definitively chosen as the correct answer.

Question 4

The nominal interest rate is 10%,the expected inflation rate is 5%,and the combined state-federal tax rate is 35%.The expected after-tax real interest rate is
A)1)50%.
B)3)25%.
C)5)00%.
D)6)50%.

Accepted Answer

The answer of The nominal interest rate is 10%,the expected...

Question 5

The yield curve shows
A)the yields on stocks of different maturities.
B)the interest rates on bonds of different maturities.
C)the yields on stocks with differing default risk.
D)the yields on bonds with differing default risk.

Accepted Answer

The yield curve is a graph that shows the relationship between the interest rates (yield) and the time to maturity of various bonds or securities. Therefore, the correct answer is B, which states that the yield curve represents the interest rates on bonds of different maturities.

Question 6

When a person gets an increase in current income,what is likely to happen to consumption and saving?
A)Consumption increases and saving increases.
B)Consumption increases and saving decreases.
C)Consumption decreases and saving increases.
D)Consumption decreases and saving decreases.

Accepted Answer

When a person's current income increases, typically, both consumption and saving increase. This is because the person has more disposable income, part of which is likely to be spent on goods and services (increasing consumption) and part of which may be saved for future use (increasing saving).

Question 7

When a person receives an increase in wealth,what is likely to happen to consumption and saving?
A)Consumption increases and saving increases.
B)Consumption increases and saving decreases.
C)Consumption decreases and saving increases.
D)Consumption decreases and saving decreases.

Accepted Answer

When a person receives an increase in wealth, they are likely to increase their consumption (spending) since they have more money to spend. However, their saving may decrease as they may feel they can afford to save less and enjoy their new wealth. Therefore, the correct answer is B.

Question 8

With no inflation and a nominal interest rate (i)of .03,a person can trade off one unit of current consumption for ________ units of future consumption.
A)0)97
B)1)03
C).03
D)-.03

Accepted Answer

With no inflation, the real interest rate is equal to the nominal interest rate. Therefore, the person can invest one unit of current consumption at a rate of i=0.03 and receive 1.03 units of consumption in the future. So, the person can trade off one unit of current consumption for 1.03 units of future consumption.

Question 9

The desire to have a relatively even pattern of consumption over time is known as
A)excess sensitivity.
B)the substitution effect.
C)the consumption-smoothing motive.
D)forced saving.

Accepted Answer

The consumption-smoothing motive refers to the desire to have a relatively even pattern of consumption over time, usually to avoid large fluctuations in living standards caused by temporary income changes or unforeseen events such as illness or job loss.

Question 10

The yield curve generally slopes upward because
A)longer maturity bonds typically pay higher interest rates than shorter maturity bonds.
B)longer maturity bonds typically pay lower interest rates than shorter maturity bonds.
C)shorter maturity bonds have more default risk.
D)longer maturity bonds are not taxable.

Accepted Answer

The yield curve generally slopes upward because longer maturity bonds typically pay higher interest rates than shorter maturity bonds. This is due to the fact that investors demand a higher rate of return for tying up their money for a longer period of time.

Question 11

Aunt Agatha has just left her nephew $5000.The most likely response is for her nephew to
A)increase current consumption,but not future consumption.
B)decrease current consumption,but increase future consumption.
C)increase future consumption,but not current consumption.
D)increase both current consumption and future consumption.

Accepted Answer

Receiving an unexpected sum of money, such as an inheritance, typically leads individuals to increase their spending in both the short term (current consumption) and save or invest a portion for the long term (future consumption), reflecting an overall increase in their consumption possibilities.

Question 12

The stock market just crashed; the Dow Jones Industrial Average fell by 750 points.You would expect the effect on aggregate consumption to be the largest if which of the following facts was true?
A)The crash had been preceded by a large run-up in the price of stocks.
B)Most stocks were owned by insurance companies.
C)Most stocks were owned by pension funds that invested in the market.
D)Many individuals had invested in the stock market immediately prior to the crash.

Accepted Answer

If many individuals had invested in the stock market immediately prior to the crash, they are likely to feel the effects of the crash more acutely than larger institutional investors like insurance companies or pension funds. These individuals may feel compelled to reduce their consumption and save more in order to cushion themselves against further losses.

Question 13

Last year,Linus earned a salary of $25,000 and he spent $24,000,thus saving $1,000.At the end of the year,he received a bonus of $1,000 and he spent $500 of it,saving the other $500.What was his marginal propensity to consume?
A)0.96
B)0.50
C)0.04
D)0.02

Accepted Answer

Marginal Propensity to Consume (MPC) is the fraction of additional income that a person consumes rather than saves.
In this case, Linus saved $1,000 out of his initial salary of $25,000, which means his MPC is 1 - 1000/25000 = 0.96.
After receiving the bonus of $1,000, he spent $500 and saved $500. Therefore, his MPC for the bonus is 1 - 500/1000 = 0.50.
The question asks for his marginal propensity to consume overall, so we take the average MPC, which is (0.96 + 0.50)/2 = 0.73. Therefore, the answer is B.

Question 14

The fraction of additional current income that a person consumes in the current period is known as the
A)consumption-smoothing motive.
B)consumption deficit.
C)saving rate.
D)marginal propensity to consume.

Accepted Answer

The fraction of additional current income that a person consumes in the current period is known as the marginal propensity to consume (MPC). It represents the additional spending that occurs when disposable income increases by $1. The MPC is important in macroeconomics because it helps determine the overall level of consumption in an economy and how changes in income affect it.

Question 15

An increase in the personal income tax rate on interest income will
A)increase desired saving because the expected after-tax real interest rate rises.
B)decrease desired saving because the expected after-tax real interest rate rises.
C)decrease desired saving because the expected after-tax real interest rate falls.
D)increase desired saving because the expected after-tax real interest rate falls.

Accepted Answer

An increase in the personal income tax rate on interest income reduces the after-tax return to savers. This decrease in the expected after-tax real interest rate causes a decrease in desired saving, as savers will have less incentive to save. Therefore, the correct answer is C.

Question 16

If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a ________ in consumption and a ________ in saving,for someone who's a lender.
A)fall; fall
B)fall; rise
C)rise; rise
D)rise; fall

Accepted Answer

When the substitution effect (which encourages more saving as the real interest rate rises, by making future consumption more attractive relative to current consumption) is larger than the income effect (which could encourage more current consumption because the individual feels wealthier with higher interest income), a rise in the real interest rate leads to a decrease in current consumption and an increase in saving for someone who is a lender. This is because they are incentivized to save more due to the higher return on savings, at the expense of current consumption.

Question 17

With a nominal interest rate of 4%,an expected inflation rate of 1%,and interest income taxed at a rate of 25%,what is the expected after-tax real interest rate?
A)3%
B)2%
C)1%
D)0%

Accepted Answer

The answer of With a nominal interest rate of 4%,an...

Question 18

If the substitution effect of the real interest rate on saving is smaller than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a ________ in consumption and a ________ in saving,for someone who's a lender.
A)fall; fall
B)fall; rise
C)rise; rise
D)rise; fall

Accepted Answer

If the substitution effect is smaller than the income effect, then a rise in real interest rate leads to an overall increase in saving. However, for a lender, the income effect dominates as the increase in interest rate leads to an increase in interest income, thus leading to an increase in consumption. Therefore, consumption falls and savings increase, which is reflected in choice D.

Question 19

An increase in expected future output while holding today's output constant would
A)increase today's desired consumption and increase desired national saving.
B)increase today's desired consumption and decrease desired national saving.
C)decrease today's desired consumption and increase desired national saving.
D)decrease today's desired consumption and decrease desired national saving.

Accepted Answer

The answer of An increase in expected future output while...

Question 20

Three factors that cause interest rates among different financial instruments to vary are
A)default risk,expected inflation,and taxability.
B)default risk,current inflation,and taxability.
C)default risk,maturity,and taxability.
D)default risk,expected inflation,and maturity.

Accepted Answer

Default risk, maturity, and taxability are the three main factors that cause interest rates to vary among different financial instruments. Default risk refers to the likelihood that the borrower will fail to make payments, maturity refers to the length of time until the loan or investment is due, and taxability refers to whether the interest earned is subject to taxation. Current inflation is not as significant a factor as expected inflation in determining interest rates, and is often reflected in the price of inflation-protected securities rather than in interest rates themselves.

Quiz 4: Consumption, Saving, and Investment

If an investor has a tax rate on interest income of 30% and the inflation rate is 4%,which bond has the highest expected after-tax real interest rate?

If an investor has a tax rate on interest income of 25% and the inflation rate is 4%,which bond has the lowest expected after-tax real interest rate?

Desired national saving equals

The nominal interest rate is 10%,the expected inflation rate is 5%,and the combined state-federal tax rate is 35%.The expected after-tax real interest rate is

The yield curve shows

When a person gets an increase in current income,what is likely to happen to consumption and saving?

When a person receives an increase in wealth,what is likely to happen to consumption and saving?

With no inflation and a nominal interest rate (i) of .03,a person can trade off one unit of current consumption for ________ units of future consumption.

The desire to have a relatively even pattern of consumption over time is known as

The yield curve generally slopes upward because

Aunt Agatha has just left her nephew $5000.The most likely response is for her nephew to

The stock market just crashed; the Dow Jones Industrial Average fell by 750 points.You would expect the effect on aggregate consumption to be the largest if which of the following facts was true?

Last year,Linus earned a salary of $25,000 and he spent $24,000,thus saving $1,000.At the end of the year,he received a bonus of $1,000 and he spent $500 of it,saving the other $500.What was his marginal propensity to consume?

The fraction of additional current income that a person consumes in the current period is known as the

An increase in the personal income tax rate on interest income will

If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a in consumption and a in saving,for someone who's a lender.

With a nominal interest rate of 4%,an expected inflation rate of 1%,and interest income taxed at a rate of 25%,what is the expected after-tax real interest rate?

If the substitution effect of the real interest rate on saving is smaller than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a in consumption and a in saving,for someone who's a lender.

An increase in expected future output while holding today's output constant would

Three factors that cause interest rates among different financial instruments to vary are