Question 1

The stock market boom during the 1990s
A) boosted consumption relative to income.
B) depressed the percentage of disposable income saved by households.
C) may explain the behavior of household savings during that decade.
D) All of the above.

Accepted Answer

The stock market boom during the 1990s led to increased wealth for households, which in turn boosted consumption relative to income and depressed the percentage of disposable income saved by households. Therefore, all of the given choices are correct.

Question 2

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 3

Between 1984 and 1989, the S&P 500 index more than ________: and between 1994 and 2000 it ________.
A) doubled; tripled
B) tripled; Doubled
C) doubled; decreased
D) tripled; decreased

Accepted Answer

Between 1984 and 1989, the S&P 500 index more than doubled, and between 1994 and 2000, it tripled.

Question 4

The strong cyclical pattern in consumer ________ spending strengthens the case for policy ________.
A) nondurables, activism
B) nondurables, rules
C) durables, activism
D) durables, rules
E) services, rules

Accepted Answer

Durables spending is more cyclical than nondurables or services spending, making a stronger case for policy activism to stabilize the economy.

Question 5

When uncertainty over the timing of death is added to the LCH, this ________ the planning horizon and ________ the MPC for transitory income.
A) shortens, raises
B) shortens, lowers
C) lengthens, raises
D) lengthens, lowers

Accepted Answer

The answer of When uncertainty over the timing of death...

Question 6

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 7

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 8

With a rise in the stock market, the simple LCH model with no bequests predicts ________ in current consumption. Then when adding to the model bequests due to catastrophic illnesses and expenses that fail to occur, current consumption is ________.
A) a fall, still predicted to fall
B) a fall, predicted to rise
C) no change, predicted to rise
D) a rise, still predicted to rise
E) a rise, predicted to remain unchanged

Accepted Answer

The answer of With a rise in the stock market,...

Question 9

When it is assumed that people desire a smooth pattern of consumption enjoyment, if not consumption expenditure, this limits the permanent-income and life-cycle hypotheses to predicting the demand for consumer
A) durables.
B) durables and services.
C) services and nondurables.
D) nondurables and durables.
E) nondurables.

Accepted Answer

The answer of When it is assumed that people desire...

Question 10

In the life-cycle hypothesis, if a person enters working life with an inherited stock of assets, this
A) raises his consumption during the working years.
B) raises his consumption during the retirement years.
C) raises his consumption in every year.
D) lowers his consumption during the retirement years.
E) lowers his consumption during the working years.

Accepted Answer

The life-cycle hypothesis suggests that individuals plan their consumption and savings behaviour over their life cycle. If a person enters working life with an inherited stock of assets, it provides them with additional resources, allowing them to increase their consumption in every year, not just during working or retirement years.

Question 11

Leaving out spending on consumer durables, the LCH and the PIH strengthens the case for policy ________ and the essential ________ of the private economy.
A) rules, stability
B) rules, instability
C) activism, stability
D) activism, instability

Accepted Answer

Both the LCH (Life-Cycle Hypothesis) and the PIH (Permanent Income Hypothesis) suggest that consumption is primarily determined by income rather than changes in wealth or borrowing. This strengthens the case for policy rules that promote stability rather than activism, as changes in income are outside the control of policymakers. Additionally, the focus on income as the primary determinant of consumption reinforces the importance of the private economy in driving economic growth and stability.

Question 12

By the nature of consumer ________, it is reasonable to treat most of the expenditure on them as a form of saving rather than consumption, which it what it takes in permanent-income and life-cycle models to make the saving ratio ________ with rising income.
A) nondurables, rise
B) services, fall
C) services, rise
D) durables, rise
E) durables, fall

Accepted Answer

Durables are long-lasting goods that provide utility over time, so they can be considered a form of investment or saving. As income rises, people are more likely to purchase durable goods, leading to an increase in the saving ratio.

Question 13

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

According to the National Income and Product Accounts (NIPA), the household savings rate in the United States fell sharply during the 1990s and was only 0.7% by the year 2004. This is the only option that accurately describes the trend in household savings during the period in question.

Question 14

Beginning in 1970 there was ________ relationship between the household saving rate and the ratio of the net worth to disposable income.
A) strong positive
B) strong negative
C) very weak but positive
D) weak but negative

Accepted Answer

The answer of Beginning in 1970 there was ________ relationship...

Question 15

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 16

Households affected by a "liquidity constraint" have consumption ________ sensitive to changes in current income that is predicted by the LCH, and a saving ratio that may not ________ in a recession.
A) less, rise
B) less, fall
C) more, rise
D) more, fall

Accepted Answer

The answer of Households affected by a "liquidity constraint" have...

Question 17

Standard life-cycle analysis predicts that a stock market crash that suddenly reduces the sale value of stocks ________ consumption expenditures.
A) reduces
B) increases
C) has no effect on
D) all of the above are possible with a market crash.

Accepted Answer

A stock market crash would likely reduce the value of investments, causing individuals to have less wealth and potentially reducing their willingness and ability to spend money on consumption. Therefore, consumption expenditures would likely be reduced.

Question 18

In the permanent-income hypothesis incorporating rational expectations, the short-run MPC is high when changes in current income
A) are small.
B) are considered a good predictor of future income changes.
C) are considered a poor predictor of future income changes.
D) occur when the economy is nearing cyclical peaks or troughs.

Accepted Answer

In the permanent-income hypothesis, individuals base their consumption decisions on their expected future income. If they believe that changes in current income are a good predictor of future income changes, they may be more likely to adjust their spending in the short run. Thus, the short-run MPC is high when changes in current income are considered a good predictor of future income changes.

Question 19

In the permanent-income hypothesis incorporating rational expectations, the actual cyclical pattern of consumption in the United States is too ________ to justify the assumption that a current change in income ________.
A) smooth, is a poor guide to future income changes
B) volatile, is a poor guide to future income changes
C) smooth, leads to a gradual change in permanent income
D) volatile, leads to a gradual change in permanent income

Accepted Answer

The actual cyclical pattern of consumption in the United States is too volatile to justify the assumption that a current change in income is a poor guide to future income changes. This means that the permanent-income hypothesis that incorporates rational expectations does not hold up well in practice, as actual consumption tends to be more impacted by changes in current income than the hypothesis would suggest.

Question 20

By the life-cycle hypothesis, a cyclical boom which causes inflation to accelerate and thus causes people to ________ the real value they estimate their wealth to represent, leads them to ________ the proportion of their current income devoted to consumption, which turns out to be a ________ influence on the economy.
A) lower, reduce, stabilizing
B) lower, increase, destabilizing
C) raise, increase, stabilizing
D) raise, reduce, stabilizing
E) raise, reduce, destabilizing

Accepted Answer

The answer of By the life-cycle hypothesis, a cyclical boom...

Quiz 15: The Economics of Consumption Behavior

The stock market boom during the 1990s

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

Between 1984 and 1989, the S&P 500 index more than : and between 1994 and 2000 it .

The strong cyclical pattern in consumer spending strengthens the case for policy .

When uncertainty over the timing of death is added to the LCH, this the planning horizon and the MPC for transitory income.

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

With a rise in the stock market, the simple LCH model with no bequests predicts in current consumption. Then when adding to the model bequests due to catastrophic illnesses and expenses that fail to occur, current consumption is .

When it is assumed that people desire a smooth pattern of consumption enjoyment, if not consumption expenditure, this limits the permanent-income and life-cycle hypotheses to predicting the demand for consumer

In the life-cycle hypothesis, if a person enters working life with an inherited stock of assets, this

Leaving out spending on consumer durables, the LCH and the PIH strengthens the case for policy and the essential of the private economy.

By the nature of consumer , it is reasonable to treat most of the expenditure on them as a form of saving rather than consumption, which it what it takes in permanent-income and life-cycle models to make the saving ratio with rising income.

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

Beginning in 1970 there was ________ relationship between the household saving rate and the ratio of the net worth to disposable income.

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

Households affected by a "liquidity constraint" have consumption sensitive to changes in current income that is predicted by the LCH, and a saving ratio that may not in a recession.

Standard life-cycle analysis predicts that a stock market crash that suddenly reduces the sale value of stocks ________ consumption expenditures.

In the permanent-income hypothesis incorporating rational expectations, the short-run MPC is high when changes in current income

In the permanent-income hypothesis incorporating rational expectations, the actual cyclical pattern of consumption in the United States is too to justify the assumption that a current change in income .

By the life-cycle hypothesis, a cyclical boom which causes inflation to accelerate and thus causes people to the real value they estimate their wealth to represent, leads them to the proportion of their current income devoted to consumption, which turns out to be a influence on the economy.