Question 1

When uncertainty over the timing of death is added to the LCH,this ________ the planning horizon and ________ the MPC for transitory income.

Accepted Answer

The answer of When uncertainty over the timing of death...

Question 2

In the life-cycle hypothesis,if a person enters working life with an inherited stock of assets,this

Accepted Answer

The life-cycle hypothesis suggests that individuals plan their consumption and savings behaviour over their life cycle. If a person enters working life with an inherited stock of assets, it provides them with additional resources, allowing them to increase their consumption in every year, not just during working or retirement years.

Question 3

In the permanent-income hypothesis incorporating rational expectations,the actual cyclical pattern of consumption in the United States is too ________ to justify the assumption that a current change in income ________.

Accepted Answer

The permanent-income hypothesis incorporating rational expectations assumes that individuals base their consumption decisions on their expected permanent income, which is a measure of their long-term ability to consume. However, if the actual cyclical pattern of consumption is too volatile, it suggests that individuals are not accurately predicting their future income, which would undermine the assumption that a current change in income is a good guide to future income changes. Therefore, option B, which states that the actual cyclical pattern of consumption in the United States is too volatile to justify the assumption that a current change in income is a poor guide to future income changes, is the best choice.

Question 4

Beginning in 1970 there was ________ relationship between the household saving rate and the ratio of the net worth to disposable income.

Accepted Answer

The relationship was strong negative, meaning as the household saving rate decreased, the ratio of net worth to disposable income increased, indicating that households were saving less but their net worth relative to their income was rising.

Question 5

Standard life-cycle analysis predicts that a stock market crash that suddenly reduces the sale value of stocks ________ consumption expenditures.

Accepted Answer

A stock market crash that reduces the sale value of stocks leads to a decline in household wealth and a decrease in consumer confidence, which can in turn reduce consumption expenditures. Therefore, option A is correct, while options B and C are not likely. Option D is too broad and not specific to the scenario in question.

Question 6

Between 1984 and 1989,the S&P 500 index more than ________,and between 1994 and 2000 it ________.

Accepted Answer

Between 1984 and 1989, the S&P 500 index more than doubled, reflecting a period of strong economic growth and bullish stock market conditions. Then, between 1994 and 2000, which includes the late 1990s' dot-com bubble, the index more than tripled as technology stocks soared.

Question 7

The life-cycle hypothesis predicts there to be a rather ________ short-run multiplier and thus a rather ________ private economy.

Accepted Answer

According to the life-cycle hypothesis, individuals adjust their consumption based on their expected lifetime income, hence in the short-run, the multiplier effect is predicted to be low. However, in the long-run, the multiplier effect could be higher due to individuals' ability to adjust their consumption patterns over time. Therefore, a stable private economy is more likely when using the life-cycle hypothesis.

Question 8

In the permanent-income hypothesis incorporating rational expectations,the short-run MPC is high when changes in current income

Accepted Answer

In the permanent-income hypothesis incorporating rational expectations, consumers base their consumption decisions not only on their current income but also on their expectations of future income. So, when changes in current income are considered a good predictor of future income changes, consumers will adjust their consumption accordingly, leading to a higher short-run MPC.

Question 9

When it is assumed that people desire a smooth pattern of consumption enjoyment,if not consumption expenditure,this limits the permanent-income and life-cycle hypotheses to predicting the demand for consumer

Accepted Answer

The permanent-income and life-cycle hypotheses suggest that people aim to smooth consumption over time, focusing on services and nondurables, which provide ongoing consumption enjoyment rather than one-time utility like durables.

Question 10

According to Friedman,the apparent conflict between cross-section data which shows a saving rate that varies with income group and time-series data which shows that the saving ratio over the past century is fairly constant is resolved by

Accepted Answer

The answer of According to Friedman,the apparent conflict between cross-section...

Question 11

According to the life-cycle hypothesis,if the average person expects to live another 48 years,the short-run MPC out of unexpected changes in income is

Accepted Answer

The answer of According to the life-cycle hypothesis,if the average...

Question 12

Households affected by a "liquidity constraint" have consumption ________ sensitive to changes in current income that is predicted by the LCH,and a saving ratio that may not ________ in a recession.

Accepted Answer

Households facing liquidity constraints cannot smooth consumption over time as predicted by the Life-Cycle Hypothesis (LCH), making their consumption more sensitive to changes in current income. In a recession, these households may not be able to save more, so their saving ratio may fall.

Question 13

Working with the life-cycle hypothesis,we find in a cross-section study of consumption that as income rises there is a growing proportion of ________ people and thus a ________ saving ratio.

Accepted Answer

According to the life-cycle hypothesis, as income rises and people move from their working years to their retirement years, they save more in order to finance their future consumption needs. Therefore, in a cross-section study of consumption, we would expect to see a growing proportion of working people (who are still in the saving phase of their life-cycle) and, as a result, a rising saving ratio.

Question 14

With a rise in the stock market,the simple LCH model with no bequests predicts ________ in current consumption.Then when adding to the model bequests due to catastrophic illnesses and expenses that fail to occur,current consumption is ________.

Accepted Answer

The answer of With a rise in the stock market,the...

Question 15

In the life-cycle hypothesis,a person who expects to work for R years earning Y dollars per year,and live for a total of L years,will consume ________ per year.

Accepted Answer

The answer of In the life-cycle hypothesis,a person who expects...

Question 16

By the nature of consumer ________,it is reasonable to treat most of the expenditure on them as a form of saving rather than consumption,which it what it takes in permanent-income and life-cycle models to make the saving ratio ________ with rising income.

Accepted Answer

Durables are long-lasting goods like cars, appliances, and furniture, and they tend to be purchased less frequently than other products. By the nature of consumer durables, it is reasonable to treat most of the expenditure on them as a form of saving rather than consumption. This is because they are considered long-term investments that provide utility over an extended period. As a result, the saving ratio increases with rising income.

Question 17

By the life-cycle hypothesis,a cyclical boom which causes inflation to accelerate and thus causes people to ________ the real value they estimate their wealth to represent,leads them to ________ the proportion of their current income devoted to consumption,which turns out to be a ________ influence on the economy.

Accepted Answer

By the life-cycle hypothesis, a cyclical boom which causes inflation to accelerate and thus causes people to lower the real value they estimate their wealth to represent, leads them to reduce the proportion of their current income devoted to consumption, which turns out to be a stabilizing influence on the economy.

Question 18

In the life-cycle hypothesis,people are assumed to have a consumption pattern that leads them to dissave

Accepted Answer

According to the life-cycle hypothesis, people tend to consume more in their working years and save for their retirement, which means they dissave in their retirement years. Therefore, option C is the correct choice. A, B, and D are incorrect because they do not accurately reflect the consumption pattern assumed by the life-cycle hypothesis.

Question 19

Leaving out spending on consumer durables,the LCH and the PIH strengthens the case for policy ________ and the essential ________ of the private economy.

Accepted Answer

The LCH (life-cycle hypothesis) and PIH (permanent income hypothesis) both suggest that individuals' consumption is primarily determined by their income and lifetime wealth, rather than current fluctuations in income. This strengthens the case for policy rules that ensure stability in the overall economy, rather than activism that tries to fine-tune short-term fluctuations. Additionally, the emphasis on the essential role of the private economy suggests that stability is necessary for it to function effectively.

Question 20

The strong cyclical pattern in consumer ________ spending strengthens the case for policy ________.

Accepted Answer

Durables spending is more cyclical than nondurables or services spending, making a stronger case for policy activism to stabilize the economy.

Quiz 15: The Economics of Consumption Behavior

When uncertainty over the timing of death is added to the LCH,this the planning horizon and the MPC for transitory income.

In the life-cycle hypothesis,if a person enters working life with an inherited stock of assets,this

In the permanent-income hypothesis incorporating rational expectations,the actual cyclical pattern of consumption in the United States is too to justify the assumption that a current change in income .

Beginning in 1970 there was ________ relationship between the household saving rate and the ratio of the net worth to disposable income.

Standard life-cycle analysis predicts that a stock market crash that suddenly reduces the sale value of stocks ________ consumption expenditures.

Between 1984 and 1989,the S&P 500 index more than ,and between 1994 and 2000 it .

The life-cycle hypothesis predicts there to be a rather short-run multiplier and thus a rather private economy.

In the permanent-income hypothesis incorporating rational expectations,the short-run MPC is high when changes in current income

When it is assumed that people desire a smooth pattern of consumption enjoyment,if not consumption expenditure,this limits the permanent-income and life-cycle hypotheses to predicting the demand for consumer

According to Friedman,the apparent conflict between cross-section data which shows a saving rate that varies with income group and time-series data which shows that the saving ratio over the past century is fairly constant is resolved by

According to the life-cycle hypothesis,if the average person expects to live another 48 years,the short-run MPC out of unexpected changes in income is

Households affected by a "liquidity constraint" have consumption sensitive to changes in current income that is predicted by the LCH,and a saving ratio that may not in a recession.

Working with the life-cycle hypothesis,we find in a cross-section study of consumption that as income rises there is a growing proportion of people and thus a saving ratio.

With a rise in the stock market,the simple LCH model with no bequests predicts in current consumption.Then when adding to the model bequests due to catastrophic illnesses and expenses that fail to occur,current consumption is .

In the life-cycle hypothesis,a person who expects to work for R years earning Y dollars per year,and live for a total of L years,will consume ________ per year.

By the nature of consumer ,it is reasonable to treat most of the expenditure on them as a form of saving rather than consumption,which it what it takes in permanent-income and life-cycle models to make the saving ratio with rising income.

By the life-cycle hypothesis,a cyclical boom which causes inflation to accelerate and thus causes people to the real value they estimate their wealth to represent,leads them to the proportion of their current income devoted to consumption,which turns out to be a influence on the economy.

In the life-cycle hypothesis,people are assumed to have a consumption pattern that leads them to dissave

Leaving out spending on consumer durables,the LCH and the PIH strengthens the case for policy and the essential of the private economy.

The strong cyclical pattern in consumer spending strengthens the case for policy .