An individual who faces a binding borrowing constraint will have a higher marginal propensity to consume compared to an individual who is unconstrained from borrowing.
Assume the utility functions for current consumption and future consumption are the same. Then, if the patience parameter is 0.90, an individual will need more consumption in the future relative to the present in order to receive the same amount of lifetime utility from current consumption as from future consumption.
Flag question: Question 3Question 31 pts
Consider an agent with a utility function that exhibits diminishing marginal utility. If consumption rises by 10 units, then total utility will increase the most if the initial level of consumption was
The answer depends on the specific utility function.
Consider the neoclassical model with log utility where the patience parameter can take on any number between zero and one. Which of the following statements is true?
An increase in the patience parameter will increase current consumption.
An increase in the patience parameter will increase both current and future consumption.
An increase in the patience parameter will increase future consumption.
An increase in the patience parameter will not change future consumption.
If Ricardian equivalence holds, then
a tax cut today financed by tax increases in the future will stimulate consumption.
a tax cut today financed by tax increases in the future will contract consumption.
a tax cut today financed by tax increases in the future will have no effect on the aggregate level of consumption.
a tax cut today financed by tax increases in the future is the best fiscal policy to undertake in a recession where consumption spending is low.
If the patience parameter is equal to 0.5 and the interest rate is 5%, then future consumption will be larger than current consumption.
If the patience parameter is one, the marginal propensity to consume is higher if the neoclassical consumption model has three periods instead of having two periods.
If the permanent income hypothesis is correct, which of the following events is likely to raise current consumption the most?
A worker receives an expected salary bonus.
An individual receives interest payments on an asset that has a fixed interest rate.
A student finds a dollar on the ground.
A worker unexpectedly receives a major promotion.
In the neoclassical consumption model where utility takes a general functional form, an increase in the interest rate will unambiguously raise first-period consumption.
In the neoclassical consumption model with log utility functions for current and future consumption, an increase in the interest rate will increase the growth rate of consumption.
In the neoclassical consumption model, individuals’ lifetime utility depends on future consumption only.
Suppose that the interest rate is 10 percent. An agent has initial assets of $200,000. Labor income in the current period is $50,000. Labor income in the future period is $110,000. What is the agent’s total wealth?
Suppose that the patience parameter is equal to one, interest rates are positive, and that utility function u(c) is the same for current consumption as it is for future consumption. Then an agent with a marginal utility of current consumption that is lower than the marginal utility of consumption in the future should
increase current consumption relative to future consumption.
increase future consumption relative to current consumption.
make no changes to consumption.
It is impossible to say what the agent should do to maximize utility.
Suppose the economy is composed of some households that obey the permanent income hypothesis as well as some households that are very sensitive to changes in income. Then, an expected 1 percent change in aggregate income will definitely raise aggregate current consumption by 1 percent.
The idea that changes in consumption are unpredictable because all known information is already taken into account when current consumption decisions are made is known as
the permanent-income hypothesis.
the life cycle model of consumption.
the random walk view of consumption.
diminishing marginal utility of consumption.
The limited rationality of economic agents
motivates individuals to place less emphasis on current consumption.
motivates individuals to place more emphasis on current consumption.
motivates limited borrowing.
motivates excessive saving.
Question 171 pts
When income is uncertain, precautionary savings increases.
Which of the following statements about aggregate consumption data is false?
From 1970 to 2015, household debt as a fraction of U.S. GDP has generally been rising.
From 1970 to 2015, the personal saving rate has generally declined in the United States.
Recently, China’s saving rate has been rising, which is consistent with predictions of the permanent-income hypothesis.
From 1970 to 2015, U.S. households have generally increased their consumption.
Which of the following will have the largest increase on current consumption?
An agent who obeys the permanent income hypothesis receives an expected salary bonus of one dollar.
An agent who knows that taxes will increase one dollar in the future receives a tax break of one dollar in the current period.
An agent is worried she will lose a dollar of income this period, so she engages in precautionary saving.
An agent with a binding borrowing constraint unexpectedly finds a dollar on the floor.
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