Question 1

In Irving Fisher's two-period model augmented by a borrowing constraint, an example of a consumer for whom the borrowing constraint might likely be binding would be:
A) a college student.
B) a college student's parent.
C) a college professor.
D) the president of a bank.

Accepted Answer

A college student is likely to have limited income and may need to borrow to finance their education or living expenses, making the borrowing constraint binding.

Question 2

According to the life-cycle model, when wealth and income increase together in the long run, the average propensity to consume.
A) increases
B) decreases
C) remains constant
D) can either increase or decrease

Accepted Answer

The life-cycle model suggests that individuals plan their consumption and savings behavior over their lifetime. When both wealth and income increase proportionally, the average propensity to consume remains constant as individuals adjust their consumption to maintain a stable consumption pattern over time.

Question 3

According to the life-cycle model, the short-run consumption function will not continue to hold in the long run because:
A) increases in wealth shift the short-run function upward.
B) decreases in the average propensity to consume shift the short-run function downward.
C) increases in income shift the short-run function upward.
D) increases in the average life span shift the short-run function upward.

Accepted Answer

In the life-cycle model, as individuals accumulate wealth over time, their consumption patterns change, leading to an upward shift in the short-run consumption function. This reflects the idea that wealthier individuals tend to consume more, altering the relationship between income and consumption in the long run.

Question 4

According to the life-cycle model, the average propensity to consume does not fall as income increases in the long run because:
A) wealth and income grow together.
B) as income increases wealth decreases.
C) saving is constant over the life cycle.
D) wealth is constant over the life cycle.

Accepted Answer

The life-cycle model assumes that individuals save during their working years and then consume during their retirement years, implying that wealth and income grow together over the life cycle. Therefore, the average propensity to consume does not fall as income increases in the long run.

Question 5

According to Franco Modigliani's life-cycle hypothesis, the principal determinant(s) of consumption is (are):
A) permanent income.
B) income and wealth.
C) transitory income.
D) wealth.

Accepted Answer

The answer of According to Franco Modigliani's life-cycle hypothesis, the...

Question 6

According to Modigliani's life-cycle hypothesis, if a consumer wants equal consumption in every year and the interest rate is zero, then the marginal propensity to consume out of wealth ______ as years ______ decrease.
A) increases; of life remaining
B) decreases; of life remaining
C) increases; until retirement
D) decreases; until retirement

Accepted Answer

With zero interest rate and a desire for equal consumption every year, the marginal propensity to consume out of wealth increases as the years of life remaining decrease, because the consumer has fewer years to spread their wealth over.

Question 7

According to Franco Modigliani's life-cycle hypothesis, the time of life at which an individual has the largest amount of wealth is at:
A) birth.
B) death.
C) retirement.
D) his or her parents' death.

Accepted Answer

According to the life-cycle hypothesis, individuals accumulate wealth throughout their working life and then use that wealth to support themselves in retirement when they are no longer receiving income from work. Therefore, retirement is the time of life at which an individual is likely to have the largest amount of wealth.

Question 8

The life-cycle model assumes that consumers use saving and borrowing to ______ consumption over their life cycle.
A) increase
B) decrease
C) smooth
D) vary

Accepted Answer

The life-cycle model assumes that consumers use saving and borrowing to smooth consumption over their life cycle. This means that they save during their working years to provide for retirement and unexpected expenses, and borrow if necessary to maintain a consistent level of consumption throughout their lifetime. By doing so, they are able to avoid drastic fluctuations in their consumption patterns and maintain a stable standard of living over time.

Question 9

According to Modigliani's life-cycle hypothesis, the consumption function shifts upward as _____ increases.
A) income
B) wealth
C) the marginal propensity to consume out of income
D) the number of years until retirement

Accepted Answer

Modigliani's life-cycle hypothesis suggests that consumption at any point in time is determined by an individual's lifetime income and wealth, not just their current income. Therefore, as wealth increases, the consumption function shifts upward because individuals are expected to spread their wealth over their lifetime, leading to an increase in consumption.

Question 10

A borrowing constraint that is not binding occurs when a consumer wants to consume ______ in period one than he or she earns in period(s) _____.
A) less; one
B) more; one
C) less; one and two
D) more; one and two

Accepted Answer

If a consumer wants to consume less in period one than he or she earns in period one or two, then the borrowing constraint is not binding. Therefore, choice A is the correct answer.

Question 11

If a consumer is in a position in which a borrowing constraint limits his or her current consumption and a one-time tax is levied on his or her current income, then the tax will:
A) lower the consumer's future consumption.
B) not affect the consumer's future consumption.
C) increase the consumer's future consumption.
D) have no effect on either current or future consumption.

Accepted Answer

Since the consumer is already at a borrowing constraint, any reduction in current income due to a tax will not change their consumption behavior; they cannot borrow more to maintain their current consumption level. Thus, their future consumption remains unaffected as they were already consuming at their maximum capacity given the borrowing constraint.

Question 12

A consumption function based on the Fisher two-period model is consistent with the Keynesian consumption function for consumers who:
A) would like to borrow, but cannot.
B) are initially borrowers when future income increases.
C) are initially savers when future income increases.
D) are initially borrowers when the interest rate increases.

Accepted Answer

The Fisher two-period model suggests that consumers decide their consumption based on their lifetime income and interest rates, aiming to smooth consumption over time. The Keynesian consumption function posits that current income is the primary determinant of consumption. Option A is consistent with the Keynesian view because consumers who would like to borrow but cannot are forced to rely solely on their current income for consumption, aligning with the Keynesian emphasis on the impact of current income on consumption.

Question 13

According to the life-cycle model, when wealth is constant in the short run, the average propensity to consume ______ as income increases.
A) increases
B) decreases
C) remains constant
D) can either increase or decrease

Accepted Answer

When wealth is constant in the short run, the life-cycle model suggests that the average propensity to consume decreases as income increases. This is because individuals tend to save a larger portion of their income as it grows, assuming their consumption needs do not increase at the same rate as their income.

Question 14

In Irving Fisher's two-period consumption model, if Y₁ = 15,000, Y₂ = 20,000, the interest rate r is 0.50 (50 percent), and there is a constraint on borrowing that is binding, then C₁ equals: A) 15,000. B) 20,000. C) 28,333. D) 35,000.

Accepted Answer

When there is a binding borrowing constraint, the consumer cannot borrow against future income, so C₁ equals Y₁, which is 15,000.

Question 15

In Irving Fisher's two-period consumption model, if Y₁ = 15,000, Y₂ = 20,000, the interest rate r is 0.50 (50 percent), and there is a constraint on borrowing that is binding, then C₂ equals: A) 20,000. B) 22,500. C) 35,000. D) 42,500.

Accepted Answer

When borrowing is constrained, the consumer cannot borrow against future income, so they can only consume their income in each period. Therefore, C2 equals Y2, which is 20,000.

Question 16

If a consumer cannot borrow, then consumption in period one must be ______ income in period(s) _____.
A) less than; one
B) less than or equal to; one
C) less than; one and two
D) less than or equal to; one and two

Accepted Answer

If a consumer cannot borrow, their consumption in period one must be less than or equal to their income in period one, as they cannot spend more than they have without borrowing.

Question 17

In Irving Fisher's two-period model, consumption for a consumer with a binding borrowing constraint equals an amount that is:
A) equal to current income.
B) greater than current income.
C) equal to future income.
D) greater than future income.

Accepted Answer

With a binding borrowing constraint, the consumer cannot borrow against future income, so their consumption is limited to their current income.

Question 18

In the Fisher two-period model, if the consumer is a saver, consumption in periods one and two are normal goods, and the income effect of an increase in interest rate is less than the substitution effect, then saving:
A) will increase.
B) will decrease.
C) will not change.
D) may either increase or decrease.

Accepted Answer

A higher interest rate increases the return on saving and makes current consumption relatively more expensive compared to future consumption. The higher substitution effect dominates the income effect, resulting in an increase in saving. Therefore, the answer is A.

Question 19

Franco Modigliani's life-cycle hypothesis puts great emphasis on saving for:
A) a house.
B) a car.
C) retirement.
D) medical emergencies.

Accepted Answer

The life-cycle hypothesis states that individuals will save more during their working years in order to finance their retirement. Therefore, the answer is retirement.

Question 20

Franco Modigliani's answer to Simon Kuznets's puzzle regarding long-term constancy of the average propensity to consume is that:
A) the average propensity to consume depends on the wealth-to-income ratio, and income and wealth tend to grow together over time.
B) both rich and poor individuals have the same average propensity to consume.
C) demographic shifts have acted to just cancel out movements in the average propensity to consume.
D) every consumer consumes all of his or her income over a lifetime, so the average propensity to consume is constant at one.

Accepted Answer

Modigliani's explanation for the long-term constancy of the average propensity to consume is that it depends on the wealth-to-income ratio, and since income and wealth tend to grow together over time, the average propensity to consume remains relatively constant.

Quiz 16: Understanding Consumer Behavior

In Irving Fisher's two-period model augmented by a borrowing constraint, an example of a consumer for whom the borrowing constraint might likely be binding would be:

According to the life-cycle model, when wealth and income increase together in the long run, the average propensity to consume.

According to the life-cycle model, the short-run consumption function will not continue to hold in the long run because:

According to the life-cycle model, the average propensity to consume does not fall as income increases in the long run because:

According to Franco Modigliani's life-cycle hypothesis, the principal determinant(s) of consumption is (are) :

According to Modigliani's life-cycle hypothesis, if a consumer wants equal consumption in every year and the interest rate is zero, then the marginal propensity to consume out of wealth as years decrease.

According to Franco Modigliani's life-cycle hypothesis, the time of life at which an individual has the largest amount of wealth is at:

The life-cycle model assumes that consumers use saving and borrowing to ______ consumption over their life cycle.

According to Modigliani's life-cycle hypothesis, the consumption function shifts upward as _____ increases.

A borrowing constraint that is not binding occurs when a consumer wants to consume __ in period one than he or she earns in period(s) _.

If a consumer is in a position in which a borrowing constraint limits his or her current consumption and a one-time tax is levied on his or her current income, then the tax will:

A consumption function based on the Fisher two-period model is consistent with the Keynesian consumption function for consumers who:

According to the life-cycle model, when wealth is constant in the short run, the average propensity to consume ______ as income increases.

In Irving Fisher's two-period consumption model, if Y₁ = 15,000, Y₂ = 20,000, the interest rate r is 0.50 (50 percent) , and there is a constraint on borrowing that is binding, then C₁ equals:

In Irving Fisher's two-period consumption model, if Y₁ = 15,000, Y₂ = 20,000, the interest rate r is 0.50 (50 percent) , and there is a constraint on borrowing that is binding, then C₂ equals:

If a consumer cannot borrow, then consumption in period one must be __ income in period(s) _.

In Irving Fisher's two-period model, consumption for a consumer with a binding borrowing constraint equals an amount that is:

In the Fisher two-period model, if the consumer is a saver, consumption in periods one and two are normal goods, and the income effect of an increase in interest rate is less than the substitution effect, then saving:

Franco Modigliani's life-cycle hypothesis puts great emphasis on saving for:

Franco Modigliani's answer to Simon Kuznets's puzzle regarding long-term constancy of the average propensity to consume is that: