Question 1

In Irving Fisher's two-period model, if the consumer is initially a saver and the interest rate and first-period consumption increase, then we can conclude that the income effect:
A) was greater than the substitution effect.
B) was less than the substitution effect.
C) exactly offset the substitution effect.
D) and the substitution both increased consumption.

Accepted Answer

When the interest rate increases, the substitution effect typically encourages saving by making future consumption more attractive relative to current consumption. However, if the consumer increases first-period consumption despite the higher interest rate, it indicates that the income effect (which makes the consumer feel wealthier and thus encourages more consumption in both periods) dominated the substitution effect.

Question 2

In the Fisher two-period model, if the consumer is a saver, consumption in periods one and two are normal goods, and the income effect of an increase in interest rate is greater than the substitution effect, then saving:
A) will increase.
B) will decrease.
C) will not change.
D) may either increase or decrease.

Accepted Answer

In this scenario, an increase in interest rates leads to a decrease in consumption in both periods (substitution effect) and a decrease in total income (income effect), which amplifies the effect towards lower consumption. Since consumption decreases, saving, which is the difference between income and consumption, will decrease as well. Therefore, the correct choice is B) will decrease.

Question 3

The marginal rate of substitution between first-period consumption and second-period consumption:
A) is the inverse of the slope of an indifference curve, in which first-period consumption is graphed along the horizontal axis.
B) is generally high when first-period consumption is high.
C) indicates by how much first-period consumption changes for a one-unit change in first-period income.
D) reveals the rate at which the consumer is willing to substitute second-period consumption for first-period consumption.

Accepted Answer

The marginal rate of substitution between first-period consumption and second-period consumption reveals the rate at which the consumer is willing to substitute second-period consumption for first-period consumption, making option D the correct choice. Option A is incorrect because the inverse of the slope of an indifference curve, in which first-period consumption is graphed along the horizontal axis, gives the marginal rate of substitution between second-period consumption and first-period consumption. Option B is incorrect because the marginal rate of substitution is not necessarily high when first-period consumption is high. Option C is incorrect because the marginal rate of substitution does not indicate by how much first-period consumption changes for a one-unit change in first-period income.

Question 4

A normal good is a good that:
A) provides pleasure.
B) would generally be owned by an average household.
C) has a value greater than zero.
D) is desired in larger quantities by a consumer when his or her income rises.

Accepted Answer

A normal good is a type of good whose demand increases with an increase in the income of the consumer. Thus, when a consumer's income rises, they are more likely to desire larger quantities of a normal good.

Question 5

Every indifference curve shows combinations of first-period and second-period consumption that:
A) are tangent to the intertemporal budget constraint.
B) have equal income and substitution effects.
C) are available to the consumer.
D) make the consumer equally happy.

Accepted Answer

Indifference curves are a graphical representation of the consumer's preferences, and each curve shows combinations of the two periods' consumption that yield equal levels of satisfaction. Therefore, the correct answer is D, as all points on the same indifference curve are equally preferred by the consumer. Choices A, B, and C are not accurate, as they do not describe the purpose or meaning of indifference curves.

Question 6

In Irving Fisher's two-period model, if the consumer is initially a saver and the interest rate increases, and first-period consumption decreases, then we can conclude that the income effect:
A) was greater than the substitution effect.
B) was less than the substitution effect.
C) exactly offset the substitution effect.
D) and the substitution both decreased consumption.

Accepted Answer

In Irving Fisher's two-period model, when the interest rate increases, the consumer's intertemporal budget constraint shifts leftward. This generates both income and substitution effects on consumption. Since the consumer is initially a saver, his or her first-period consumption decreases in response to the interest rate increase. This indicates that the substitution effect dominates the income effect, leading to a net decrease in consumption. Therefore, Option B is the best choice.

Question 7

When the consumer has chosen his or her optimal values of first-period and second-period consumption, the marginal rate of substitution equals:
A) 1 plus the interest rate r.
B) 1 minus the interest rate r.
C) 1 divided by the interest rate r.
D) the interest rate r.

Accepted Answer

The marginal rate of substitution (MRS) between first-period and second-period consumption equals 1 plus the interest rate r. This is because the MRS reflects the rate at which a consumer is willing to trade off consumption in one period for consumption in another, taking into account the opportunity cost of consuming now versus later, which is affected by the interest rate.

Question 8

Use the following to answer questions : Exhibit: Budget Constraint -(Exhibit: Budget Constraint) Based on the graph, if Y₁ and Y₂ represent income in period one and period two, respectively, at which point along the budget constraint would a consumer be a borrower in period one? A) A B) B C) C D) D

Accepted Answer

The answer of Use the following to answer questions :
Exhibit:...

Question 9

An increase in income in period one in Irving Fisher's two-period consumption model increases consumption in:
A) period one, but decreases consumption in period two.
B) period one, but does not change consumption in period two.
C) both periods one and two, as long as consumption in period one and consumption in period two are both normal goods.
D) period two, but does not change consumption in period one.

Accepted Answer

According to Irving Fisher's two-period consumption model, if income increases in period one, consumption in period one will increase because it is a normal good. However, consumption in period two will also increase because period two consumption is assumed to be a function of total lifetime income, which has increased due to the increase in income in period one. If both period one and period two consumption are normal goods, then an increase in income in period one will increase consumption in both periods. Therefore, choice C is correct.

Question 10

In Irving Fisher's two-period model, if consumption in both periods is a normal good, then an increase in income in period two:
A) increases consumption in period one only.
B) increases consumption in period two only.
C) increases consumption in both periods.
D) does not increase consumption in either period.

Accepted Answer

In the two-period model, if consumption in both periods is a normal good, then an increase in income in period two will increase the budget for consumption in period two and also increase the resource base for the individual, allowing for greater consumption in period one as well. Therefore, consumption increases in both periods.

Question 11

In Irving Fisher's two-period model, the income effect of an increase in the interest rate in the first period for a saver is the:
A) decrease in the relative price of second-period consumption.
B) additional income earned on first-period saving.
C) decrease in the relative price of first-period consumption.
D) additional income earned on second-period saving.

Accepted Answer

In Fisher's two-period model, an increase in the interest rate increases the income of a saver due to the additional income earned on the savings from the first period, which is the income effect.

Question 12

In Irving Fisher's two-period model, the substitution effect of an increase in the interest rate in the first period, for a saver, is the:
A) decrease in the relative price of second-period consumption.
B) additional income earned on first-period saving.
C) decrease in the relative price of first-period consumption.
D) additional income earned on second-period saving.

Accepted Answer

The substitution effect of an increase in the interest rate, for a saver, is the decrease in the relative price of second-period consumption. This is because the higher interest rate makes future consumption cheaper relative to current consumption, encouraging saving.

Question 13

In Irving Fisher's two-period model, if the consumer is initially borrowing in period one and the real interest rate rises, first-period consumption will:
A) certainly rise.
B) certainly fall.
C) remain constant.
D) either rise or fall.

Accepted Answer

In Fisher's two-period model, when the real interest rate rises, it becomes more expensive to borrow in the first period. This means that the consumer would need to reduce their borrowing in the first period to maintain intertemporal budget constraint between the present and the future. As a result, the first-period consumption would fall. Therefore, the correct choice is B.

Question 14

In John Maynard Keynes's model, the most important determinant of current consumption is current income. In Irving Fisher's model, the most important determinant of current consumption is:
A) also current income.
B) the interest rate.
C) lifetime resources.
D) future income.

Accepted Answer

According to Irving Fisher's model, the most important determinant of current consumption is lifetime resources, which includes both current and future income, as well as assets and other resources that can be used to support consumption over a person's lifetime. The interest rate may also play a role in shaping consumption decisions, but it is not considered the most important determinant in Fisher's model.

Question 15

In Irving Fisher's two-period model, if the consumer is initially saving in period one and the real interest rate rises, then first-period consumption will:
A) certainly fall.
B) certainly rise.
C) remain constant.
D) either rise or fall.

Accepted Answer

In Irving Fisher's two-period model, if the real interest rate rises, the substitution effect encourages more saving (less consumption) in the first period because future consumption becomes relatively cheaper. However, the income effect, due to increased return on savings, might encourage more immediate consumption if the consumer feels wealthier. The net effect on first-period consumption depends on the relative strengths of these two effects, so it could either rise or fall.

Question 16

In Irving Fisher's two-period model, if the consumer is initially saving in period one and the real interest rate rises, then:
A) both the income and substitution effects will make the consumer want to consume less in period one.
B) both the income and substitution effects will make the consumer want to consume more in period one.
C) the substitution effect will make the consumer want to consume less in period one but the income effect will make him or her want to consume more.
D) the income effect will make the consumer want to consume less in period one, but the substitution effect will make him or her want to consume more.

Accepted Answer

In Irving Fisher's two-period model, when the real interest rate rises, the substitution effect will make the consumer want to save more in period one and consume less, while the income effect will make the consumer want to consume more in period one due to the increase in purchasing power resulting from the increased interest income earned on savings. Therefore, the substitution effect outweighs the income effect, making the consumer want to consume less in period one. Hence, the correct choice is C, where the substitution effect will make the consumer want to consume less in period one, but the income effect will make him or her want to consume more.

Question 17

In the Fisher two-period model, the consumer achieves his or her optimum combination of current and future consumption by selecting:
A) any combination on his or her highest indifference curve.
B) the combination on his or her highest indifference curve that is tangent to his or her budget constraint.
C) any combination on his or her budget constraint.
D) the combination on his or her budget constraint in which period-one consumption equals period-one income and period-two consumption equals period-two income.

Accepted Answer

The Fisher two-period model assumes that the consumer has a fixed amount of income to allocate between two periods of time. The consumer's goal is to maximize utility subject to the budget constraint. The consumer achieves this goal by selecting the combination of current and future consumption on the highest indifference curve that is tangent to the budget constraint. This point of tangency represents the optimal combination of consumption for the consumer given their budget constraint and preferences. Therefore, the correct choice is B.

Question 18

Use the following to answer questions : Exhibit: Residential Investment -(Exhibit: Budget Constraint) Based on the graph, if Y₁ and Y₂ represent income in period one and period two, respectively, r is the interest rate, and the consumer chooses to consume combination A on the budget constraint, what will be the level of consumption in period two, C₂? A) Y₁(1 + r) + Y₂ B) Y₁ + Y₂/(1 + r) C) Y₁/(1 + r) + Y₂ D) Y₁ + Y₂(1 + r)

Accepted Answer

The answer of Use the following to answer questions :
Exhibit:...

Question 19

The Fisher two-period model shows that current consumption depends on:
A) only current income.
B) only future income.
C) current income, future income, and the interest rate.
D) current income, future income, the interest rate, and the rate of inflation.

Accepted Answer

The Fisher two-period model includes current income, future income, and the interest rate as factors that influence current consumption. The rate of inflation is not explicitly included in the model.

Question 20

The behavior of consumers spreading increases in income earned in one period into increases in consumption over several periods is known as:
A) random-walk consumption.
B) transitory consumption.
C) consumption smoothing.
D) the income effect.

Accepted Answer

This behavior of consumers is known as consumption smoothing, where they spread out increases in income over several periods to maintain a steady level of consumption.

Quiz 16: Understanding Consumer Behavior

In Irving Fisher's two-period model, if the consumer is initially a saver and the interest rate and first-period consumption increase, then we can conclude that the income effect:

In the Fisher two-period model, if the consumer is a saver, consumption in periods one and two are normal goods, and the income effect of an increase in interest rate is greater than the substitution effect, then saving:

The marginal rate of substitution between first-period consumption and second-period consumption:

A normal good is a good that:

Every indifference curve shows combinations of first-period and second-period consumption that:

In Irving Fisher's two-period model, if the consumer is initially a saver and the interest rate increases, and first-period consumption decreases, then we can conclude that the income effect:

When the consumer has chosen his or her optimal values of first-period and second-period consumption, the marginal rate of substitution equals:

Use the following to answer questions : Exhibit: Budget Constraint -(Exhibit: Budget Constraint) Based on the graph, if Y1 and Y2 represent income in period one and period two, respectively, at which point along the budget constraint would a consumer be a borrower in period one?

An increase in income in period one in Irving Fisher's two-period consumption model increases consumption in:

In Irving Fisher's two-period model, if consumption in both periods is a normal good, then an increase in income in period two:

In Irving Fisher's two-period model, the income effect of an increase in the interest rate in the first period for a saver is the:

In Irving Fisher's two-period model, the substitution effect of an increase in the interest rate in the first period, for a saver, is the:

In Irving Fisher's two-period model, if the consumer is initially borrowing in period one and the real interest rate rises, first-period consumption will:

In John Maynard Keynes's model, the most important determinant of current consumption is current income. In Irving Fisher's model, the most important determinant of current consumption is:

In Irving Fisher's two-period model, if the consumer is initially saving in period one and the real interest rate rises, then first-period consumption will:

In Irving Fisher's two-period model, if the consumer is initially saving in period one and the real interest rate rises, then:

In the Fisher two-period model, the consumer achieves his or her optimum combination of current and future consumption by selecting:

The Fisher two-period model shows that current consumption depends on:

The behavior of consumers spreading increases in income earned in one period into increases in consumption over several periods is known as:

Use the following to answer questions : Exhibit: Budget Constraint -(Exhibit: Budget Constraint) Based on the graph, if Y₁ and Y₂ represent income in period one and period two, respectively, at which point along the budget constraint would a consumer be a borrower in period one?