Question 1

Assuming no bequests, with a real interest rate of 10 percent, wealth of $60,000, current income of $70,000, current consumption of $30,000 and future income of $100,000, future consumption equals ________.
A) $30,000.
B) #70,000.
C) #100,000.
D) $210,000.

Accepted Answer

The present value of future income can be calculated as:
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the interest rate, and n is the number of years.
Using this formula, the present value of future income is:
PV = 100,000 / (1 + 0.1)^1 = 90,909.09
Therefore, the total wealth at present is:
Wealth = 60,000 + 90,909.09 = 150,909.09
The total consumption at present is:
Consumption = 30,000 + PV = 30,000 + 90,909.09 = 120,909.09
The future consumption can be calculated as:
Future Consumption = Consumption * (1 + r)^n
where n is the number of years in the future.
Using this formula, the future consumption is:
Future Consumption = 120,909.09 * (1 + 0.1)^1 = 132,999.99
Therefore, the best choice is (D) $210,000.

Question 2

The theory of intertemporal choice was presented by ________.
A) Adam Smith in 1776
B) Alfred Marshall in 1871
C) Irving Fisher in 1930
D) John Maynard Keynes in 1936

Accepted Answer

The theory of intertemporal choice was presented by Irving Fisher in his 1930 book "The Theory of Interest".

Question 3

Which of the following is not true of all indifference curves?
A) they slope downward.
B) the point at which one indifference curve intersects another represents an optimal consumption basket.
C) they are bowed toward the origin.
D) they can intersect with a budget constraint one or more times.

Accepted Answer

The point at which one indifference curve intersects another does not necessarily represent an optimal consumption basket. It only indicates that the consumer is indifferent between the consumption baskets on each curve. The optimal consumption basket is the one that lies on the highest indifference curve that is still tangent to the budget constraint.

Question 4

Discounting involves dividing next-period income by________.
A) one plus the real rate of interest
B) the nominal rate of interest.
C) current income.
D) the real rate of interest.

Accepted Answer

Discounting involves adjusting future income, taking into account the time value of money. This means dividing next-period income by one plus the real rate of interest. This yields the present value of that next-period income.

Question 5

A theory of saving is necessarily a theory of consumption, because ________.
A) by definition, any unit of disposable income that is not a consumption expenditure is a unit of saving
B) consumption decisions are made after saving has occurred
C) private saving is equal to private investment
D) the goal of consumption choices is to achieve the desired level of savings

Accepted Answer

Saving and consumption are two sides of the same coin. As per the definition, saving is any unit of disposable income that is not spent on consumption, therefore a theory of saving must explain the factors influencing consumption decisions as well. The amount of savings is determined by the level of consumption expenditure. Hence, a theory of saving is necessarily a theory of consumption.

Question 6

Intertemporal Budget Constraint
 
-Referring to the table above, if consumption in period one is zero, then consumption in period two cannot be greater than ________.
A) $72,800
B) $70,400
C) $71,200
D) $70,800

Accepted Answer

The answer of Intertemporal Budget Constraint
 
-Referring to the table...

Question 7

Indifference curves tend to be convex because ________.
A) they are bowed inwards toward the origin.
B) consumers dislike large fluctuations in consumption from one period to the next.
C) of the gap between real and nominal interest rates.
D) the marginal rate of substitution exceeds the price effect.

Accepted Answer

Indifference curves tend to be convex because consumers generally prefer a combination of goods that smooths out consumption over time and avoids large fluctuations in consumption from one period to the next. This results in a diminishing marginal rate of substitution between goods as a consumer moves from one point to another on an indifference curve, causing the curve to be bowed inwards towards the origin. The gap between real and nominal interest rates (C) and the price effect on marginal utility (D) are not factors that contribute to the convex shape of indifference curves.

Question 8

The optimal level of consumption is achieved when ________.
A) consumption in one period is equal to consumption in the next period
B) utility in one period is equal to utility in the next period
C) all income and wealth has been spent
D) the slope of the indifference curve is equal to the slope of the budget line.

Accepted Answer

The slope of the indifference curve represents the marginal rate of substitution between goods, indicating how much of one good an individual is willing to give up to obtain more of the other good while remaining indifferent. The slope of the budget line represents the rate at which an individual can exchange one good for another (i.e. the price ratio). The optimal level of consumption is achieved when the marginal rate of substitution between goods (represented by the slope of the indifference curve) is equal to the price ratio (represented by the slope of the budget line). Therefore, option D is the correct answer.

Question 9

Assuming no bequests, with a real rate of interest of 10 percent, wealth of $60,000, current income of $70,000, future income of $180,000 and future consumption of $158,000, current consumption must equal ________.
A) $158,000.
B) $150,000.
C) $152,000.
D) $130,000.

Accepted Answer

The answer of Assuming no bequests, with a real rate...

Question 10

Intertemporal Budget Constraint
 
-Referring to the table above, if consumption in period one is $20,000, then consumption in period two cannot be greater than ________.
A) $52,800
B) $50,400
C) $49,600
D) $50,000

Accepted Answer

The answer of Intertemporal Budget Constraint
 
-Referring to the table...

Question 11

If an indifference curve intersects the budget constraint at two points, then ________.
A) the consumer would be equally happy at either of those two points
B) optimal consumption is found by moving to a lower indifference curve
C) optimal consumption is found by moving to a lower budget constraint
D) the consumer will choose the point that minimizes consumption expenditure

Accepted Answer

If an indifference curve intersects the budget constraint at two points, both points provide the same level of utility or satisfaction to the consumer. Therefore, the consumer would be equally happy at either of those two points.

Question 12

Intertemporal Budget Constraint
 
-Referring to the table above, the present discounted value of initial wealth plus total income is ________.
A) $67,308
B) $71,200
C) $70,400
D) $68,462

Accepted Answer

The answer of Intertemporal Budget Constraint
 
-Referring to the table...

Question 13

The after-tax income received by the household sector is known as ________.
A) disposable income.
B) retained earnings.
C) net national product per capita.
D) Gross Domestic Product.

Accepted Answer

Disposable income refers to the income received by households after taxes have been deducted from their gross income. Hence, it is the correct answer. Retained earnings refer to the profits that companies keep for reinvestment or other purposes. Net national product per capita refers to the total output of a country divided by the number of people living in the country, and Gross Domestic Product (GDP) refers to the total market value of all final goods and services produced within a country's borders in a given period. While both these measures are related to income, they do not specifically refer to the after-tax income received by households.

Question 14

An intertemporal budget constraint is downward sloping due to ________.
A) the trade-off between current and future consumption.
B) the law of diminishing marginal productivity.
C) the law of supply.
D) the law of demand.

Accepted Answer

An intertemporal budget constraint shows the trade-off between current and future consumption. As more resources are allocated towards current consumption, fewer resources are available for investment and future consumption, resulting in a downward sloping constraint.

Question 15

Disposable income represents ________.
A) the income received by firms, e.g. corporations.
B) an increase in GDP.
C) a decrease in GDP.
D) the after-tax income received by the household.

Accepted Answer

Disposable income is the after-tax income received by households. It is the amount of money that households have available to spend or save after taxes have been taken out of their gross income.

Question 16

Which of the following is the correct statement of an intertemporal budget constraint?
A) C1 = (1 + r)(W + Y1) - C2 + Y2
B) C2 = (1 + r)(W + Y1 - C1) + Y2
C) W = (1 + r)(Y1 + Y2) - (C1 + C2)
D) Y2 = (1 + r)(W + Y1 - C1)

Accepted Answer

Intertemporal budget constraint shows the relationship between an individual's current consumption, future consumption, and income. It is essentially balancing consumption and income over two or more time periods. Option B correctly represents this concept, where C1 is current consumption, C2 is future consumption, W is current wealth or income, Y1 is income in the current period, Y2 is income in the future period, and r is the interest rate. Option A is incorrect as it has only included the present value of the future income but not subtracted the future consumption. Option C is incorrect as it has not included any consumption variables. Option D is incorrect as it has only included the future income and not consumption variables.

Question 17

The farther an indifference curve lies from the origin ________.
A) the greater the level of individual income.
B) the lower its utility.
C) the lower the level of individual income.
D) the higher its utility.

Accepted Answer

The farther an indifference curve lies from the origin, the higher its utility. This is because the curve represents all the combinations of two goods that provide the same level of satisfaction to the consumer. As the curve moves away from the origin, the consumer has more of both goods, leading to a higher level of satisfaction. Therefore, a curve that lies farther from the origin represents a higher utility level for the consumer.

Question 18

Gross income net of taxes is known as ________.
A) Gross Domestic Product, or GDP
B) disposable income.
C) Gross Domestic Product per capita.
D) retained earnings.

Accepted Answer

Gross income net of taxes, also known as take-home pay, is typically the amount of income that an individual or household has available for spending, saving, or investing after all taxes and other deductions have been taken out. This is what is referred to as disposable income. Gross Domestic Product (GDP) is a measure of a country's economic output, Gross Domestic Product per capita is GDP divided by the population, and retained earnings refer to the portion of a company's profits that are not distributed as dividends to shareholders but are instead kept for reinvesting in the business or paying off debt.

Question 19

An intertemporal budget constraint ________.
A) describes how much time an individual consumer has to spend their disposable net national product.
B) is independent of the real interest rate and wealth of the household.
C) divides consumption spending into three categories: spending on durables, non-durables and services.
D) describes how much a person can consume today versus tomorrow.

Accepted Answer

An intertemporal budget constraint describes how much a person can consume today versus tomorrow. It takes into account current and future income, current and future consumption, and the real interest rate. It sets a limit on how much an individual can consume in the present and in the future, given their current and future income and expenses.

Question 20

Consumption spending comprises what percentage of total spending?
A) 0.7 percent.
B) 7 percent.
C) 70 percent.
D) 700 percent.

Accepted Answer

Consumption spending comprises approximately 70 percent of total spending in the economy.

Quiz 18: Consumption and Saving

Assuming no bequests, with a real interest rate of 10 percent, wealth of $60,000, current income of $70,000, current consumption of $30,000 and future income of $100,000, future consumption equals ________.

The theory of intertemporal choice was presented by ________.

Which of the following is not true of all indifference curves?

Discounting involves dividing next-period income by________.

A theory of saving is necessarily a theory of consumption, because ________.

Intertemporal Budget Constraint -Referring to the table above, if consumption in period one is zero, then consumption in period two cannot be greater than ________.

Indifference curves tend to be convex because ________.

The optimal level of consumption is achieved when ________.

Assuming no bequests, with a real rate of interest of 10 percent, wealth of $60,000, current income of $70,000, future income of $180,000 and future consumption of $158,000, current consumption must equal ________.

Intertemporal Budget Constraint -Referring to the table above, if consumption in period one is $20,000, then consumption in period two cannot be greater than ________.

If an indifference curve intersects the budget constraint at two points, then ________.

Intertemporal Budget Constraint -Referring to the table above, the present discounted value of initial wealth plus total income is ________.

The after-tax income received by the household sector is known as ________.

An intertemporal budget constraint is downward sloping due to ________.

Disposable income represents ________.

Which of the following is the correct statement of an intertemporal budget constraint?

The farther an indifference curve lies from the origin ________.

Gross income net of taxes is known as ________.

An intertemporal budget constraint ________.

Consumption spending comprises what percentage of total spending?