Question 1

Which equation represents the intertemporal budget constraint for a consumer in a two-period model with initial financial assets $$V$$, current income $$Y_1$$, future income $$Y_2$$, and real interest rate $$r$$?

Accepted Answer

$$C_1$$ + \frac{$$C_2$$}{1+r} = V + $$Y_1$$ + \frac{$$Y_2$$}{1+r}$$

Question 2

If a consumer receives a one-time bonus in the current period ($$Y_1$$ increases by $$a$$), what happens to the intertemporal budget constraint?

Accepted Answer

The budget constraint shifts parallel upward.

Question 3

What is the marginal propensity to consume (MPC) out of current income, and how is it calculated?

Accepted Answer

$$MPC = \frac{\Delta C_1$}{\Delta Y_1$}$$

Question 4

Suppose the real interest rate $$r$$ increases. For a consumer who is initially a saver ($$S_p \u003e 0$$), which effect is most likely to dominate if the substitution effect is stronger than the income effect?

Accepted Answer

Current consumption $$C_1$$ decreases and savings $$S_p$$ increase.

Question 5

Given the budget constraint $$C_1$$ + \frac{$$C_2$$}{1+r} = $$Y_1$$ + \frac{$$Y_2$$}{1+r}$$, what is the maximum possible value for C_1$ if the consumer spends all resources in the current period?

Accepted Answer

$$C_1$$ = $$Y_1$$ + \frac{$$Y_2$$}{1+r}$$

Question 6

If future income $$Y_2$$ increases by $$a$$, how does this affect the consumer's optimal consumption and savings decisions?

Accepted Answer

Current consumption $$C_1$$ increases and savings $$S_p$$ decrease.

Question 7

Which of the following best describes the consumption-smoothing motive?

Accepted Answer

Consumers desire to have a relatively even pattern of consumption over time.

Question 8

In the two-period model, what is the present value of wealth $$W if $$initial financial assets $$V = 0$$?

Accepted Answer

$$W = Y_1$ + \frac{Y_2$}{1+r}$$

Question 9

If a consumer is a borrower ($$S_p \u003c 0) $$and the real interest rate $$r$$ increases, what is the likely effect on their consumption and savings?

Accepted Answer

Current consumption $$C_1$$ decreases and savings $$S_p$$ increase.

Question 10

Which of the following statements about indifference curves in the context of the two-period consumption model is correct?

Accepted Answer

Indifference curves are negatively sloped because increasing consumption in one period requires sacrificing consumption in the other to keep utility constant.

Question 11

A consumer faces the following intertemporal budget constraint: $$C_1$$ + \frac{$$C_2$$}{1+r} = $$Y_1$$ + \frac{$$Y_2$$}{1+r}$$. If Y_1$ increases by a$, what is the new constraint?

Accepted Answer

$$C_1$$ + \frac{$$C_2$$}{1+r} = $$Y_1 + a$$ + \frac{$$Y_2$$}{1+r}$$

Question 12

If the real interest rate $$r$$ increases, what happens to the relative price of current consumption to future consumption?

Accepted Answer

The relative price increases, making current consumption more expensive.

Question 13

Which of the following best describes the substitution effect when the real interest rate $$r$$ increases?

Accepted Answer

Consumers substitute away from current consumption to future consumption.

Question 14

If a consumer's indifference curve is tangent to the budget constraint at a point where $$C_1$$ \u003c $$Y_1$$, what does this indicate about their behavior?

Accepted Answer

The consumer is saving in the current period.

Question 15

Suppose a consumer's future income $$Y_2$$ increases by $$a. $$What is the effect on the present value of wealth $$W$$?

Accepted Answer

$$W$$ increases by $$\frac{a}{1+r}$$

Question 16

If the income effect dominates the substitution effect for a saver when $$r$$ increases, what is the likely outcome?

Accepted Answer

Current consumption $$C_1$$ increases and savings $$S_p$$ decrease.

Question 17

Which of the following is true about the empirical evidence regarding the effect of an increase in $$r on $$current consumption $$C_1$$ and savings $$S_p$$?

Accepted Answer

An increase in $$r$$ reduces $$C_1$$ and increases $$S_p$$, but the effect is not very strong.

The Consumption-Savings Decision in Macroeconomics

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