Final HW Questions

Question 1

A one-period one dollar bond is a promise to repay

a) one dollar in the second period
b) r units of goods in the second period
c) (1+r) units of goods in the second period
d) 1/(1+r) units of goods in the second period

Answer 1

c) (1+r) units of goods in the second period

Question 2

The consumer’s lifetime budget constraint states that

a) the present value of lifetime consumption must be equal to the present value of lifetime disposable income.
b) the present value of lifetime consumption plus the present value of lifetime taxes to be paid must be equal to the present value of lifetime income.
c) the present value of lifetime taxes to be paid by the consumer must be equal to the present value of government spending.
d) the present value of lifetime consumption must be equal to the present value of lifetime gross income

Answer 2

a) the present value of lifetime consumption must be equal to the present value of lifetime disposable income.

Question 3

Why is it important that consumers respond differently to temporary and permanent increases in their incomes?

a) This implies that consumption will be highly sensitive to temporary changes in income.
b) this has implications for the relative effects of temporary and permanent tax cuts.
c) This implies that a temporary tax cut will have a larger effect than a permanent one on current consumption.
d) this tells us that the timing of income increases for consumers is irrelevant

Answer 3

b) this has implications for the relative effects of temporary and permanent tax cuts.

Question 4

For a borrower in a (c,c’) graph, the optimal consumption bundle is

a) dependent on other factors
b) on the endowment point
c) to the left of the endowment point
d) To the right of the endowment point

Answer 4

d) To the right of the endowment point

Question 5

An increase in first-period income results in

a) a decrease in first-period consumption, an increase in second-period consumption, and an increase in saving.
b) an increase in first-period consumption, a decrease in second-period consumption, and an increase in saving.
c) an increase in first-period consumption, an increase in second-period consumption, and an increase in saving
d) an increase in first-period consumption, an increase in second-period consumption, and a decrease in saving.

Answer 5

c) an increase in first-period consumption, an increase in second-period consumption, and an increase in saving

Question 6

With higher future taxes

a) current consumption declines
b) current consumption stays the same
c) current consumption increases.
d) current consumption depends on other factors.

Answer 6

a) current consumption declines

Question 7

An increase in the real interest rate

a) increases savings for borrowers, but has an uncertain effect on the savings of lenders
b) has an uncertain effect on the savings of both borrowers and lenders.
c) increases savings for both borrowers and lenders.
d) increases savings for lenders, but has an uncertain effect on the savings of borrowers.

Answer 7

a) increases savings for borrowers, but has an uncertain effect on the savings of lenders

Question 8

In the two-period model, the budget constraint is kinked for all of these reasons, except

a) there are costs to banks from lending and borrowing
b) the real interest rate is greater than zero
c) there is limited commitment in the credit market
d) there is asymmetric information in the credit market

Answer 8

b) the real interest rate is greater than zero

Question 9

When there are credit-market imperfections, an increase in government debt may be advantageous because it

a) allows credit-constrained consumers to consumer more
b) encourages more private saving
c) discourages credit-constrained consumers from borrowing too much
d) eliminates the problems that cause credit-market imperfections

Answer 9

a) allows credit-constrained consumers to consumer more

Government debt that is repaid by the household in a later period works like a low-interest loan

Question 10

In the two-period model with asymmetric information, a one-unit increase in the real rate of interest on bank deposits

a) causes the real interest rate on loans to increase by more than one unit
b) causes the real interest rate on loans to decrease by more than unit
c) causes the real interest rate on loans to decrease by less than one unit
d) causes the real interest rate on loans to increase by less than one unit

Answer 10

a) causes the real interest rate on loans to increase by more than one unit

(1+r2)=(1+r1)/a

Question 11

In the two-period model with limited commitment, if the collateral constraint binds

a) increases in the present value of collateral increase current consumption and reduce future consumption
b) increases in the present value of collateral increase current consumption one-for-one.
c) increases in the present value of collateral decrease current consumption and increase future consumption
d) increases in the present value of collateral increase current consumption less than one-for-one

Answer 11

b) increases in the present value of collateral increase current consumption one-for-one.

Question 12

For a consumer not bound by the collateral constraint, an increase in the present value of the collateral leads to

a) an increase in both current and future consumption
b) an increase in current consumption and a decrease in future consumption
c) nothing
d) an increase in current consumption and no change in future consumption

Answer 12

a) an increase in both current and future consumption

Question 13

In the Chapter 10 model from class, pay as you go social security

a) all of these things are true
b) can never improve welfare for everyone
c) can improve welfare for everyone if the population growth rate is large enough
d) can never pay for itself

Answer 13

c) can improve welfare for everyone if the population growth rate is large enough

Question 14

In a frictionless world

a) Fully-funded social security is a constraint on private saving behavior, and therefore cannot make anyone better off
b) Fully funded social security is more efficient, because it is a private program instead of a government program
c) Fully funded social security must necessarily make everyone better off, as it provides for retirement
d) Fully funded social security is always preferred to pay-as-you-go social security

Answer 14

a) Fully-funded social security is a constraint on private saving behavior, and therefore cannot make anyone better off

Question 15

Most Americans feel that there is opportunity for advancement no matter where an American is born into the US income distribution, and that there is no need for government involvement in addressing income inequality

a) true; true
b) false; false
c) true; false
d) false; true

Answer 15

a) true; true

Question 16

Americans born into the lowest quintile of the US income distribution are _______ to move up out of poverty than are Europeans born into the lowest quintile of their countries’ income distributions

a) less likely
b) more likely
c) just as likely

Answer 16

a) less likely

Question 17

People from the lowest quintile of the US income distribution are ________ to attend college than/as are those in the middle classes and are ______ to move up in the income distribution.

Option 1:

a) much less likely
b) more likely
c) just as likely

Option 2:

a) much less likely
b) more likely
c) just as likely

Answer 17

Option 1:
a) much less likely

Option 2:
a) much less likely

Question 18

Tertiary (University) education rates in the US _________. At the same time, the cost of tertiary education in the US is __________.

Option 1:
a) used to be higher than in Europe but are now the same or slightly lower

b) used to be lower than in Europe but are not the same or slightly lower

Option 2:
a) both higher than in Europe and getting more expensive.

b) both lower than Europe and getting less expensive

Answer 18

Option 1:
a) used to be higher than in Europe but are now the same or slightly lower

Option 2:
a) both higher than in Europe and getting more expensive.

This isn’t necessarily a bad thing if you think that Europe is over-compensating for the positive externalities associated with advanced education, and that the US still trying to get it right through cutbacks in government/taxpayer support.

Question 19

US middle class families (middle three income quintiles) are _______ to be rewarded for investment in post-secondary education by moving up through the income distribution

a) not likely
b) likely

Answer 19

b) likely

Question 20

People who are born into the top quintile of the income distribution don’t need to bother going to college–in the data it seems that having connections is enough to do well.

a) True
b) False

Answer 20

b) False

In the data, there is significant downward-mobility for the top quintile if they don’t attend college.