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econ 410 hw6

# econ 410 hw6 - Homework 6 and 17(ECON 410 Spring 2011(Due...

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Homework 6 (Chapters 12, 16, and 17) (ECON 410, Spring 2011) (Due Thursday 04/28/2011) (A) Multiple Choice Questions: (3 points per multiple choice problem), 25 questions. 1. The consumer's budget constraint reflects the fact: A) Current consumption should equal the current income. B) Future consumption should equal the future income. C) Present value of current and future consumption should equal present value of current and future income. D) The consumer does not borrow money. 2. When the consumer has chosen his or her optimal values of first-period and second- period consumption, he finds that he doesn’t have to borrow or save. Now an increase in interest rate will make the consumer to: A) Borrow in the first period. B) Save in the first period. C) Stay the same. D) Could be any one of the above. 3. 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. 4. 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. 5. Franco Modigliani's life-cycle hypothesis puts great emphasis on saving for: A) a house. B) a car. C) retirement. D) medical emergencies. Page 1

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6. According to Modigliani's life-cycle hypothesis, if a consumer wants equal consumption in every year and the interest rate is zero, then the marginal propensity to consume out of wealth ______ as years ______ decrease. A) increases; of life remaining B) decreases; of life remaining C) increases; until retirement D) decreases; until retirement 7. According to the permanent-income hypothesis, consumption depends primarily on ______ income. A) current
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econ 410 hw6 - Homework 6 and 17(ECON 410 Spring 2011(Due...

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