Tutorial 5 - Consumption Revised

# Tutorial 5 - Consumption Revised - Tutorial 5 Consumption...

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1 Tutorial 5 Consumption Short Answer Questions 1. Explain why changes in consumption are more unpredictable if consumers obey the permanent income hypothesis and have rational expectations. 2. It is predicted that the fraction of the population that is elderly will increase over the next 20 years. What does the life-cycle model predict for the influence of this demographic on the national saving rate? 3. A study found that the elderly who do not have children dissave at about the same rate as the elderly who do not have children. What might this finding imply about the reason the elderly do not dissave as much as the life-cycle model predicts? Applications 1. Consider the following information: 0 d C C bY  d YY 0 II 0 GG 00 NX X M  (a) Assuming the marginal propensity to consume is 0.75, calculate the size of the fiscal policy multiplier. (b) Suppose the MPC increases to 0.80. Compare the size of the fiscal policy multiplier to its size when it is 0.75. What do we conclude? (c) Suppose now that d Y Y Y ; 25% ; and the MPC is 0.75. Calculate the size of the fiscal policy multiplier. What do we conclude? (d) Explain whether borrowing constraints increase or decrease the ability of fiscal policy to influence aggregate demand if there is a temporary tax cut.

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## This note was uploaded on 11/12/2011 for the course ECON 2003 taught by Professor Macoeconomics2 during the Spring '10 term at University of the West Indies at Mona.

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Tutorial 5 - Consumption Revised - Tutorial 5 Consumption...

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