Consumption Function

Within the permanent income hypothesis with rational expectations, if consumer spending is limited due to liquidity constraints, then

• permanent changes in tax policy will be effective, but temporary changes will not.

• temporary changes in tax policy will be effective, but permanent changes will not.

• neither temporary nor permanent changes in tax policy will be effective.

• both temporary and permanent changes in tax policy may be effective.

The life cycle hypothesis is consistent with a

• constant relationship between consumption and income in the short run and long run.

• variable relationship between consumption and income in the short run and a proportional long-run relationship.

• constant relationship between consumption and income in the short run but a variable relationship in the long run.

• variable relationship between consumption and income in both the short run and the long run

Which of the following are important determinants in explaining the cyclical behavior of income?

• a. Nondurable consumption

• b. Research and development spending

• c. Consumer durable goods expenditures, especially new automobile purchases

• d. All of the above

• e. None of the above

An implication of the life cycle hypothesis is that in the short run the

• APC will exceed the MPC.

• MPC will exceed the APC.

• APC will equal the MPC.

• MPC will be one.

According to the life cycle hypothesis, a one-time or transient change in income

• a. has little impact on consumer behavior.

• b. has the same effect as a change in wealth of the same amount.

• c. will not affect future expected income.

• d. All of the above.

• e. None of the above.

If the consumption function is C = 1,000 + .8Y and Y is 20,000, then the average propensity to consume is

• a. 0.8

• b. 0.85

• c. 0.75

• d. 0.70

If, according to the permanent income hypothesis,

C_t = 0.9Y^Pt and Y^P_t = Y^P_{t − 1} + 0.5(Y_t − Y^P_{t− 1}),

then the marginal propensity to consume out of current income will be

• 0.45

• 0.5

• 0.9

• 0.95

• 0.4

An expansionary monetary policy would

• a. decrease real and nominal interest rates and increase investment.

• b. decrease nominal interest rates but increase real interest rates, reducing investment.

• c. increase nominal and real interest rates, reducing investment.

• d. decrease real interest rates but increase nominal interest rates, increasing investment.

• e. increase the volume of new residential construction but have no effect on the price of existing houses.

Economists based their prediction that consumption would fall and output stagnation would occur as economies got richer on the assumption that

• a. higher income levels consumed a smaller proportion of income.

• b. higher income levels consumed a larger proportion of income.

• c. lower income levels and families at higher income levels consumed the same proportion of income.

• d. lower income levels consumed a smaller proportion of income.

The Keynesian consumption function relates consumption to

• a. past income.

• b. future income.

• c. current income.

• d. past and future income.