Question 1

The data shows that total profit in the Australian economy:
A) tends to increase in even years, and decrease in odd years, although no one can explain why.
B) tends to decrease in recessions, increase in expansions.
C) is not influenced by the business cycle.
D) has decreased steadily over time.
E) tends to increase in recessions, decrease in expansions.

Accepted Answer

The data shows that total profit in the Australian economy tends to decrease in recessions and increase in expansions, indicating a correlation with the business cycle.

Question 2

A painting is currently worth $150,000, and is expected to maintain its real value for four years. The real interest rate is expected to remain constant at 8%. What is the present value of the painting's expected price at the end of the fourth year?
A) $100,254.
B) $90,254.
C) $80,254.
D) $110,254.
E) $70,254.

Accepted Answer

The answer of A painting is currently worth $150,000, and...

Question 3

Which of the following represents human wealth?
A) Wealth that cannot be taken from a person, by law.
B) Financial wealth minus housing wealth.
C) The present discounted value of expected future after- tax labour income.
D) Total wealth minus housing wealth.
E) The sum of financial and housing wealth.

Accepted Answer

Human wealth refers to the potential future income and earnings that a person is able to generate through their skills, knowledge, and abilities. The present discounted value of expected future after-tax labor income is a measure of a person's ability to generate income in the future, and is therefore the best representation of human wealth. Choices A, B, D, and E are all related to other types of wealth, such as legal protection, financial assets, and housing assets, and do not specifically relate to human wealth.

Question 4

Suppose an individual experiences a $25,000 decrease in real income and the individual believes this decrease in income is permanent. Economic theory suggests that this individual's current consumption will:
A) decrease, remain unchanged, or increase, depending on the value of the real interest rate.
B) decrease by more than $25,000.
C) decrease at most by $25,000.
D) decrease or remain unchanged, depending on the value of the real interest rate.
E) decrease by less than $25,000.

Accepted Answer

If the individual believes the decrease in income is permanent, they will adjust their consumption level to match their new lower income level. They will not borrow against future income to maintain current consumption levels, as they do not anticipate a return to their previous income level. Therefore, their consumption level will decrease by at most $25,000, the amount of the income decrease. The value of the real interest rate is not relevant in this scenario, as the individual is not borrowing or saving to maintain their consumption level.

Question 5

Which of the following statements about consumption and investment is correct?
A) A temporary change in income will have a relatively larger effect on consumption than on investment.
B) A permanent change in income will have a relatively larger effect on consumption than on investment.
C) Consumption is more volatile than investment.
D) Investment and consumption exhibit approximately the same degree of volatility.
E) Investment is more volatile than consumption.

Accepted Answer

Investment is generally more volatile than consumption because it is more sensitive to economic conditions, interest rates, and business expectations. While both consumption and investment can fluctuate with economic cycles, investment tends to react more sharply to changes in the economic environment, leading to greater volatility.

Question 6

Assume that consumption decisions are made according to the permanent income theory. Which of the following would lead to the largest increase in current consumption?
A) Winning $10,000 in the lottery.
B) Obtaining $10,000 by winning a lawsuit.
C) Getting a one- time $10,000 bonus from your employer.
D) Taking a new job with a salary that is $10,000 higher than your current salary.
E) Inheriting $10,000 from a relative.

Accepted Answer

According to the permanent income theory, consumption decisions are based on a person's expected long-term income rather than their current income. Option D would lead to the largest increase in expected long-term income, therefore leading to the largest increase in current consumption. Options A, B, C, and E would all be considered temporary increases in income and would not have as large of an impact on expected long-term income.

Question 7

The study by Venti and Wise shows that most of the wealth of people aged 65- 69 consists of:
A) stocks and bonds.
B) social security benefits.
C) home equity.
D) personal retirement assets.
E) employer- provided pension.

Accepted Answer

The answer of The study by Venti and Wise shows...

Question 8

Suppose you are given a rare antique painting by a long- lost relative. The value of this rare antique painting would be included in which of the following?
A) Financial wealth.
B) Housing wealth.
C) Human wealth.
D) Labour wealth.
E) Investment wealth.

Accepted Answer

The answer of Suppose you are given a rare antique...

Question 9

Which of the following represents non- human wealth?
A) Total wealth minus housing wealth.
B) Total wealth minus the present discounted value of expected future after- tax labour income.
C) Financial wealth minus housing wealth.
D) Wealth that cannot be taken from a person, by law.
E) Total wealth minus financial wealth.

Accepted Answer

Non-human wealth is essentially the wealth that does not come from labor income. It is calculated by subtracting the present discounted value of expected future after-tax labor income from total wealth. This concept is used to differentiate between wealth generated from labor (human capital) and wealth derived from other sources.

Question 10

Which of the following individuals is responsible for developing the permanent income theory of consumption?
A) Keynes.
B) Friedman.
C) Lucas.
D) Modigliani.
E) Sargent.

Accepted Answer

Milton Friedman is responsible for developing the permanent income theory of consumption, which suggests that an individual's consumption at a point in time is determined not just by their current income but by their longer-term income expectations.

Question 11

Human wealth is a function (i.e., affected by changes in) of which of the following variables?
A) Current interest rates.
B) Future expected income.
C) Future expected taxes.
D) All of the above.
E) None of the above.

Accepted Answer

Human wealth is impacted by all of these variables. Current interest rates affect the present value of future income streams, future expected income affects anticipated future earnings, and future expected taxes influence the level of disposable income. Therefore, all of the above variables can impact human wealth.

Question 12

The data for Australia show that investment and profits:
A) have a clear positive relationship.
B) are positively related during recessions, and negatively related during expansions.
C) are positively related during expansions, and negatively related during recessions.
D) have a strong negative relationship.
E) move independently.

Accepted Answer

Investment and profits typically have a clear positive relationship because as profits increase, businesses have more capital to invest in growth, and as investment leads to growth, it can further increase profits. This relationship is generally observed across various economies, including Australia.

Question 13

Consumption is most likely to respond one- for- one with changes in current income when:
A) people are able to borrow as much as they wish, as long as they pay it back.
B) the change in current income is caused by the business cycle.
C) people believe the change in their current income is permanent.
D) the change in current income results from a one- time government handout.
E) people believe the change in their current income is temporary.

Accepted Answer

When people believe the change in their current income is permanent, they are more likely to adjust their consumption behavior to reflect the new level of income. This is because they expect their future income and ability to repay any loans to remain at this new level. In contrast, when people believe the change in their current income is temporary, they may save more or maintain their previous level of consumption until their income stabilizes again. Therefore, consumption is most likely to respond one-for-one with changes in current income when the change is believed to be permanent.

Question 14

The rental cost/ user cost of capital will decrease when:
A) the expected profit from the machine decreases.
B) the real interest rate increases.
C) the expected level of sales decreases.
D) the rate of depreciation decreases.
E) the expected profit from the machine increases.

Accepted Answer

A decrease in the rate of depreciation reduces the cost of using the capital over time, thereby decreasing the rental cost/user cost of capital.

Question 15

Assume that firms experience an increase in sales. We would expect that this increase in sales will cause:
A) ambiguous effects on profit per unit of capital.
B) initial increases followed by decreases in profit per unit of capital.
C) an increase in profit per unit of capital.
D) no change in profit per unit of capital.
E) a decrease in profit per unit of capital.

Accepted Answer

An increase in sales will likely lead to economies of scale and potentially increased efficiencies, which should result in increased profit per unit of capital.

Question 16

Which of the following individuals is responsible for developing the life cycle theory of consumption?
A) Friedman.
B) Keynes.
C) Lucas.
D) Sargent.
E) Modigliani.

Accepted Answer

The life cycle theory of consumption was developed by Franco Modigliani in the 1950s. The theory suggests that individuals choose their current consumption levels based on their expected lifetime income and wealth.

Question 17

Suppose current sales decrease by $150 million. Investment theory suggests that current investment must:
A) decrease by more than $150 million.
B) decrease by less than $150 million.
C) decrease by about $150 million.
D) increase, but by less than $150 million.
E) More information is required.

Accepted Answer

Investment theory does not provide a direct, one-size-fits-all answer to how investment will change in response to a decrease in current sales. The effect on investment depends on various factors such as the nature of the business, market conditions, the reason for the decrease in sales, and the company's financial health. Therefore, more information is required to determine the exact impact on investment.

Question 18

Suppose there is an income tax cut. This tax cut would have a direct effect on which of the following?
A) Financial wealth.
B) Housing wealth.
C) Human wealth.
D) Labour wealth.
E) Investment wealth.

Accepted Answer

A tax cut increases disposable income, which can enhance human wealth by increasing the present value of future labor income.

Question 19

A change in which of the following variables would affect the cash flow for a firm?
A) Current profit.
B) Current expenditure on plant and equipment.
C) Total cost.
D) Total sales revenue.
E) Expected future profit.

Accepted Answer

The answer of A change in which of the following...

Question 20

Which of the following people-none of whom has any financial or housing wealth-is most likely to be spending all of their current income?
A) A high income person expecting to retire soon, and live for a long time afterward.
B) A low income person expecting continued low income throughout life.
C) A low income person expecting a dramatic rise in income in the future.
D) A high income person expecting a dramatic drop in income in the future.
E) A high income person expecting continued high income throughout life.

Accepted Answer

The answer of Which of the following people-none of whom...

Quiz 16: Expectations, Consumption and Investment

The data shows that total profit in the Australian economy:

A painting is currently worth $150,000, and is expected to maintain its real value for four years. The real interest rate is expected to remain constant at 8%. What is the present value of the painting's expected price at the end of the fourth year?

Which of the following represents human wealth?

Suppose an individual experiences a $25,000 decrease in real income and the individual believes this decrease in income is permanent. Economic theory suggests that this individual's current consumption will:

Which of the following statements about consumption and investment is correct?

Assume that consumption decisions are made according to the permanent income theory. Which of the following would lead to the largest increase in current consumption?

The study by Venti and Wise shows that most of the wealth of people aged 65- 69 consists of:

Suppose you are given a rare antique painting by a long- lost relative. The value of this rare antique painting would be included in which of the following?

Which of the following represents non- human wealth?

Which of the following individuals is responsible for developing the permanent income theory of consumption?

Human wealth is a function (i.e., affected by changes in) of which of the following variables?

The data for Australia show that investment and profits:

Consumption is most likely to respond one- for- one with changes in current income when:

The rental cost/ user cost of capital will decrease when:

Assume that firms experience an increase in sales. We would expect that this increase in sales will cause:

Which of the following individuals is responsible for developing the life cycle theory of consumption?

Suppose current sales decrease by $150 million. Investment theory suggests that current investment must:

Suppose there is an income tax cut. This tax cut would have a direct effect on which of the following?

A change in which of the following variables would affect the cash flow for a firm?

Which of the following people-none of whom has any financial or housing wealth-is most likely to be spending all of their current income?