Oxford University Press | Online Resource Centre

Choose your answer by clicking the radio button next to your choice and then press 'Submit' to get your score.

Question 1

If, for Crusoe's current intertemporal consumption pattern (satisfying his intertemporal budget constraint), his marginal rate of intertemporal substitution is 1 and the real rate of interest is positive, then…

a) …the interest rate will fall to zero.

b) …Crusoe could increase his lifetime utility by consuming more today.

c) …Crusoe could increase his lifetime utility by consuming less today.

d) …Crusoe is necessarily a borrower.

Question 2

What is the permanent income that corresponds to present value of the two period income path Y₁=100, Y₂=125 for the real interest rate r=.5? Note: 50% not ½%!

a) 110

b) 112

c) 114

d) 116

Question 3

Crusoe begins with an endowment A. Point R is the consumption combination he would choose at real interest rate r and point R´ is the consumption combination he would choose at real interest rate r´.
Which of the following statements is true?

a) Crusoe is a lender today.

b) Crusoe's wealth has decreased because of the change in the real interest rate.

c) The marginal rate of intertemporal substitution at R is equal to r.

d) The change in interest rate does not decrease Crusoe's utility since he is free to keep his original endowment A if he so chooses.

Question 4

There are strong theoretical reasons to expect that changes in wealth are responsible for changes in consumption, nonetheless one reason that we observe a tight link between consumption and disposable income is…

a) …credit rationing changes the intertemporal budget constraint for borrowers.

b) …households attempt to smooth their consumption.

c) …household saving provides a buffer between income and expenditure.

d) …Ricardian equivalence.

Question 5

The accelerator principle states:

a) If an increase in the growth of output is expected, investment will increase.

b) If an increase in investment is expected, output will increase.

c) If an increase in the growth of investment is expected, output will increase.

d) Small swings in investment are associated with large swings of output.

Question 6

Which of the following factors does Tobin's q ratio not reflect:

a) …marginal rate of intertemporal substitution

b) …the "animal spirits" of entrepreneurs.

c) …the link between anticipated future productivity increases and current share prices.

d) …the interest rate.

Question 7

The optimal capital stock is achieved when the user cost of capital is equal to

a) …the interest rate

b) …the depreciation rate

c) …the marginal product of capital

d) …Tobin's q

Oxford University Press, Online Resource Centre, Chapter 08.

Chapter 08