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Question 01

An important difference between aggregate consumption and aggregate private investment is that:

a) the investment decision of firms is characterized by rationality whereas consumption decisions of households are much less rational.

b) investment decisions are forward-looking and consumption decisions are backward looking.

c) consumption is relatively less variable than investment.

d) none of the above.

Question 02

Point M is the endowment of Crusoe who faces a real interest rate of r. Which of the following statements is not consistent with the Figure opposite?

a) Crusoe's wealth is equal to OB.

b) Crusoe would borrow in order to consume at point R.

c) Crusoe is unable to consume his entire second period income.

d) The marginal rate of intertemporal substitution is higher at M than at R.

Question 03

What is the permanent income that corresponds to present value of the two period income path Y 1 =100, Y 2 =125 for the real interest rate r=.5? (Note: 50% not ½%!)

a) 110

b) 112

c) 114

d) 116

Question 04

If a household anticipates a permanent fall in income:

a) saving will increase in the current period.

b) consumption-smoothing will be random.

c) there will be a permanent fall in consumption of similar size to the anticipated fall in income.

d) all of the above are true.

Question 05

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´.

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 06

There are strong theoretical reasons to expect that changes in wealth are responsible for changes in consumption, 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) All of the above are true.

Question 07

If the real interest rate decreases, the optimal capital stock for a firm would increase because:

a) of the accelerator principle of investment.

b) a lower real interest rate provides an incentive to invest since the marginal productivity of the existing capital stock would be higher than the marginal cost of capital.

c) the "animal spirits" of entrepreneurs will become less volatile.

d) none of the answers are correct since, the optimal capital stock for a firm would actually decrease with a reduction in the real interest rate.

Question 08

Tobin's q is a ratio that depends:

a) negatively on the replacement cost of installed capital.

b) positively on the change in output.

c) positively on the marginal rate of intertemporal substitution.

d) negatively on the marginal cost of installing new equipment.

Oxford University Press, Online Resource Centre, Chapter 06.

Chapter 06

Instructions