Oxford University Press | Online Resource Centre

Choose your answers from a-d by clicking the radio button next to each choice and then press 'Submit' to get your score.

Question 01

Point A represents the endowments of Crusoe for today and tomorrow and the real interest rate is r . Crusoe’s wealth is equal to:

a) OB.

b) DB.

c) OY 1 +OY 2.

d) The area of the rectangle OY 1 AY 2.

Question 02

The following data are relevant for Crusoe’s intertemporal budget constraint:

150 is the present endowment
110 is the future endowment
.1 is the real interest rate (i.e. 10%) between the present and the future

Crusoe’s wealth is equal to:

a) 130

b) 250

c) 260

d) Cannot be determined from the information given.

Question 03

In a two-period world where firms can invest K in the present period in order to produce F(K) in the future period, if the real rate of interest is r, then the net return from investing K would be equal to:

a) F (K)/(1+r) minus K

b) F (K) minus K/(1+r)

c) F (K) minus K

d) K times (1+r)

Question 04

The figure opposite represents a two-period world with an initial endowment A and a productive technology, where

Y 1 is today’s endowment,
Y 2 is tomorrow’s endowment, and
The curved line through points A and E relates investment in capital through saving today in order to produce tomorrow.

The fact that point B´ lies to the right of point B means what?

a) Technological change has shifted the intertemporal budget constraint.

b) Investing in a productive technology allows a household to increase its wealth.

c) Investment demand has increased the interest rate.

d) The household could do even better by borrowing to increase today's consumption.

Question 05

The reason that it does not matter whether a firm uses debt (borrowing) or equity (own saved funds) to finance its investment plans is:

a) that Ricardian equivalence fails.

b) that in a global world it is always possible for a nation to borrow abroad.

c) that a Ponzi-scheme is necessary so the firm is indifferent.

d) that firms belong to their shareholders and the net return from investment raises their wealth.

Question 06

Consider the government budgets for a two-period model, where:

T 1 is today’s net taxes.
T 2 is tomorrow’s net taxes.
D 1 is government debt at the start of today.
D 2 is government debt at the start of tomorrow.
G 1 is today’s government spending.
G 2 is tomorrow’s government spending.
r G is the real interest rate paid on government debt.

All variables are positive.

The government’s intertemporal budget constraint requires that:

a) D 1 +G 1+G 2/(1+r G ) = T 1+T 2/(1+r G )

b) D 1 + D 2/(1+r G ) +G 1+G 2/(1+r G ) = T 1+T 2/(1+r G )

c) G 1 +G 2/(1+r G ) – (T 1+T 2/(1+r G )) =(D 1+ D 2/(1+r G ))

d) None of the above are correct

Question 07

Consider a two-period model without firms (i.e. only households and governments), where:

C 1 is present consumption of households
C 2 is future consumption of households
Y 1 is the present endowment of households
Y 2 is the future endowment of households
T 1 are present net taxes.
T 2 are future net taxes.
G 1 is present government spending.
G 2 is future government spending.
D 1 is initial government debt equal to zero.
D 2 is government debt at the start of tomorrow.
r is the real interest rate between the present and the future (same for households and the government)

When the private sector fully internalizes the public sector’s intertemporal budget constraint, the intertemporal budget constraints of the household and government for this model can be consolidated into which of the following expressions?

a) C 1 + C 2/(1+r) = (Y 1 - T 1) + ( Y 2 - T 2)/((1+r)

b) C 1 + C 2/(1+r) = (Y 1 - G 1) + ( Y 2 - G 2)/((1+r)

c) G 1 + G 2/(1+r) = T 1 + T 2/(1+r)

d) One cannot consolidate the private and public intertemporal budget constraints because of the Ricardian equivalence proposition.

Question 08

For a two period model of an open macroeconomy,

CA 1 is the current account of the present period.
CA 2 is the current account of the future period.
PCA 1 is the primary current account of the present period.
PCA 2 is the primary current account of the future period.
F 1 is the nation’s initial net asset position.
r is the real interest rate.

The nation’s intertemporal budget constraint is:

a) (PCA 1 - CA 1) + (PCA 2 – CA 2)/(1+r) = 0

b) CA 1 + CA 2/(1+r) = ‑F 1

c) CA 1 + CA 2/(1+r) = F 1

d) PCA 1 + PCA 2/(1+r) = - F 1

Oxford University Press, Online Resource Centre, Chapter 05.

Chapter 05

Instructions