Practice Quiz 10

Question 1

The Keynesian consumption function exhibits all of the following properties expect that

Answer 1

only unexpected policy changes influence consumption

Question 2

during WW2, economists using John Maynards Keyne’s theory predicted that the rate of saving after the war would be very

Answer 2

high, but that did not happen

Question 3

which of the following conjectures that underlie the Keynesian consumption function is not consistent with the data collected from the major industrialised countries?

Answer 3

the average propensity to consume decreases as income increases

Question 4

the behaviour of consumers spreading increases in income earned in one period into increases in consumption over several periods is known as

Answer 4

consumption smoothing

Question 5

the fisher two period model shows that current consumption depends on

Answer 5

current income, future income, and the interest rate

Question 6

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

Answer 6

not affect the consumer’s future consumption

Question 7

a consumption function based on the fisher two period model is consistent with the Keynesian consumption function for consumption who

Answer 7

would like to borrow, but cannot

Question 8

Franco Modigliani’s life cycle hypothesis puts great emphasis on saving for

Answer 8

retirement

Question 9

According to Modigliani’s life cycle hypothesis, the consumption function shifts upward as ____ increases

Answer 9

weath

Question 10

Franco Modigliani’s answer to Simon Kuznet’s puzzle regarding to long term constancy of the average propensity to consume is that

Answer 10

the average propensity to consume depends on the wealth-to-income ratio, and income and wealth tend to grow together over time

Question 11

Milton Friedman viewed current income as the sum of permanent income and

Answer 11

transitory income

Question 12

According to the permanent income hypothesis, households will finance a temporary increase in taxes by: reducing ___ or increasing___

Answer 12

saving; borrowing

Question 13

According tot he Friendman’s permanent-income hypothesis, if the marginal proensity to income out of permanent income equals 0.9 and current income equals $55,000 (of which 5,000 us transitory income) then consumption should equal

Answer 13

$45,000

Question 14

Milton Friedman argued that, although household studies showed that high income households generally have lower average propensities to consume, this phenomenon is due to the fact that these households have, on average

Answer 14

positive transitory income

Question 15

suppose that the government is considering two tax cuts, one temporary and one permanent. each cut will give each taxpayer the same amount in the first year. the permanent income hypothesis predicts that

Answer 15

the permanent tax cut will lead to more extra consumption in the first year

Question 16

if consumers have rational expectations and follow the permanent income hypothesis, their current consumption will increase when

Answer 16

they receive an unexpected inheritance

Question 17

if consumers correctly anticipate their future incomes

Answer 17

the saving rate will be low when consumers anticipate a boom

Question 18

economist david labison suggests that people end up saving less than they wish because of

Answer 18

the pull of instant gratification

Question 19

a binding borrowing constraint will ____ the potency of an announced future tax cut to influence aggregate demand but will ____ the potency of a temporary tax cut

Answer 19

no affect; increase

Question 20

the life cycle model predicts that if the proportion of the population that is elderly increases over the next 20 years, then the national saving rate ___ over the next 20 years will

Answer 20

decrease