Question 1

Suppose a consumer faces the following intertemporal budget constraint: $$C_1$$ + \frac{$$C_2$$}{1+r} = $$Y_1$$ + \frac{$$Y_2$$}{1+r}$$. If the real interest rate r$ increases, what happens to the slope of the budget line in a $$($$C_1$$, $$C_2$$)$$ diagram?

Accepted Answer

The slope becomes steeper, indicating that current consumption becomes relatively more expensive.

Question 2

If a consumer receives a one-time increase in current income $$Y_1 by$$ $$a$$, how does this affect their intertemporal budget constraint?

Accepted Answer

The budget line shifts outward in a parallel fashion.

Question 3

Given the utility function $$U(C_1$, C_2$)$$, what does a point on a higher indifference curve represent compared to a lower one?

Accepted Answer

A higher level of utility.

Question 4

If the marginal propensity to consume (MPC) out of current income is $$MPC = \frac{\Delta C_1$}{\Delta Y_1$}$$, which of the following is typically true in the two-period model?

Accepted Answer

$$MPC \u003c 1$$

Question 5

A consumer is initially a saver. If the real interest rate $$r$$ increases, which of the following best describes the substitution effect?

Accepted Answer

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

Question 6

Suppose a consumer has no initial financial wealth ($$V=0). $$What is the present value of their lifetime resources?

Accepted Answer

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

Question 7

If a consumer is a borrower and the real interest rate $$r$$ increases, what is the likely effect on their optimal current consumption $$C_1$$?

Accepted Answer

$$C_1$$ decreases due to both substitution and income effects.

Question 8

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 9

If a consumer's future income $$Y_2$$ increases by $$a$$, what is the effect on their current desired consumption $$C_1^d$?

Accepted Answer

$$C_1^d$ increases because the consumer smooths the higher future income.

Question 10

Consider the following scenario: A consumer receives a permanent increase in both $$Y_1$$ and $$Y_2. $$What is the expected effect on their consumption in both periods?

Accepted Answer

Consumption increases in both periods.

Question 11

In the two-period model, what is the maximum amount a consumer can consume in the current period ($$C_{1,max}) if $$they consume nothing in the future?

Accepted Answer

$$C_{1,max} = Y_1$ + \frac{Y_2$}{1+r}$$

Question 12

If the consumer's indifference curve is tangent to the budget constraint, what does this point represent?

Accepted Answer

The consumer's optimal consumption bundle.

Question 13

Suppose the real interest rate $$r$$ increases. For a saver, which of the following statements about the income effect is correct?

Accepted Answer

The income effect increases current consumption $$C_1$$ and decreases savings.

Question 14

A consumer's desired private saving $$S_p^d is $$defined as:

Accepted Answer

$$S_p^d = V + Y_1$ - C_1$

Question 15

If a consumer's initial savings are negative ($$S_p^d \u003c 0$$), what is the effect of an increase in the real interest rate $$r on $$their future income?

Accepted Answer

Their future income decreases, increasing the debt burden.

Question 16

Which of the following best describes the effect of a temporary increase in current income $$Y_1 on $$consumption and savings?

Accepted Answer

Part of the increase is consumed, and part is saved for future consumption.

Question 17

If the substitution effect of an increase in $$r$$ dominates for a saver, what happens to their current and future consumption?

Accepted Answer

Current consumption decreases, future consumption increases.

Question 18

In the two-period model, what is the opportunity cost of consuming $1 more in the current period?

Accepted Answer

$$(1 + r) of $$future consumption.

Question 19

Suppose a government policy increases $$Y_2 ($$future income) for all households. What is the likely effect on aggregate desired saving $$S^d in $$the current period?

Accepted Answer

Aggregate desired saving decreases.

Consumption-Savings Decision in Macroeconomics

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