Chapter 16. Understanding Consumer Behavior

Chapter 16. Understanding Consumer Behavior 1.The consumption decisions of individuals are not important for the: A) determination of the steady-state capital stock. B) determination of fiscal-policy multipliers. C) determination of aggregate demand. D) determination of sticky prices. 2.The marginal propensity to consume is the: A) ratio of consumption to income. B) amount consumed out of an additional dollar of income. C) amount available for consumption after precautionary saving. D) ratio of consumption to wealth. 3.The average propensity to consume is the: A) ratio of consumption to income. B) amount consumed out of an additional dollar of income. C) amount available for consumption after precautionary saving. D) ratio of consumption to wealth. 4.John Maynard Keynes believed that the marginal propensity to consume: A) was zero. B) was between zero and one. C) was one. D) increased as income increased. 5.John Maynard Keynes believed that the average propensity to consume: A) was constant. B) increased as income increased. C) decreased as income increased. D) was less than the marginal propensity to consume. 6.John Maynard Keynes believed that: A) consumers would save more if the interest rate was high. B) consumers would consume more if the interest rate was high. C) if consumers consume less, the interest rate will be high. D) the interest rate is relatively unimportant to the consumption decision. 7.If the Keynesian consumption function is written as C  C  cY , then the average propensity to consume is: A) c. B) C. C) C /Y  c. D) C  c Y . 8.If an example of a Keynesian consumption function is C = 2,000 + 0.8Y, and Y is 30,000, then the average propensity to consume is about: A) 0.8. B) 0.82. C) 0.85. D) 0.87. 9.The Keynesian consumption function exhibits all of the following properties except that: A) the marginal propensity to consume is between 0 and 1. B) the average propensity to consume decreases as income increases. C) only unexpected policy changes influence consumption. D) current income is the primary determinant of consumption. 10.Examination of data from households shows that households with high current income than do households with low current income. A) consume less B) save less C) save a smaller fraction of current income D) save a larger fraction of current income 11.Economists based their prediction that secular stagnation would occur as economies prospered on the conjecture that: A) the marginal propensity to consume is greater than zero. B) the marginal propensity to consume is less than one. C) the average propensity to consume falls as income rises. D) income is the primary determinant of consumption. 12.During World War II, economists using John Maynard Keynes's theory predicted that the rate of saving after the war would be very: A) high, and that is what happened. B) low, and that is what happened. C) low, but that did not happen. D) high, but that did not happen. 13.Simon Kuznets found that, over long periods of time in the United States, as income rose, the average propensity to consume: A) rose. B) fell. C) remained constant. D) rose and then fell. 14.Kuznets' data showed a short-run consumption function with a APC, and a long- run consumption function with a APC. A) constant; constant B) constant; falling C) falling; constant D) falling; falling 15.Empirical evidence finds that the average propensity to consume is constant: A) for only the short-run consumption function. B) for only the long-run consumption function. C) for both the short-run and the long-run consumption functions. D) for neither the short-run nor the long-run consumption functions. 16.Which of the following conjectures that underlie the Keynesian consumption function is not consistent with aggregate U.S. data? A) The marginal propensity to consume is between 0 and 1. B) The average propensity to consume decreases as income increases. C) There is a high correlation between income and consumption. D) Current income is a determinant of consumption. 17.Empirical evidence finds that the average propensity to consume is falling: A) for only the short-run consumption function. B) for only the long-run consumption function. C) for both the short-run and the long-run consumption functions. D) for neither the short-run nor the long-run consumption functions. 18.A consumer's budget constraint for two periods with positive interest rate r may be represented by the equation: A) C1 + C2 = Y1 + Y2. B) C1 + C2/(1 + r) = Y1 + Y2/(1 + r). C) C1 + C2(1 + r) = Y1 + Y2(1 + r). D) C1/(1 + r) + C2 = Y1/(1 + r) + Y2. 19.The consumer's budget constraint reflects the fact that because interest is earned on savings: A) future income is worth less than current income. B) future income is worth more than current income. C) future consumption costs more than current consumption. D) future consumption is worth more than future income. 20.In Irving Fisher's two-period consumption model, if Y1 = 20,000, Y2 = 15,000, and the interest rate r is 0.50 (50 percent), then the maximum possible consumption in period one is: A) 20,000. B) 25,000. C) 30,000. D) 35,000. 21.In Irving Fisher's two-period consumption model, if Y1 = 20,000, Y2 = 15,000, and the interest rate r is 0.50 (50 percent), then the maximum possible consumption in period two is: A) 15,000. B) 25,000. C) 35,000. D) 45,000. 22.Every indifference curve shows combinations of first-period and second-period consumption that: A) are tangent to the intertemporal budget constraint. B) have equal income and substitution effects. C) are available to the consumer. D) make the consumer equally happy. 23.The marginal rate of substitution between first-period consumption and second-period consumption: A) is the inverse of the slope of an indifference curve, in which first-period consumption is graphed along the horizontal axis. B) is generally high when first-period consumption is high. C) indicates by how much first-period consumption changes for a one-unit change in first-period income. D) reveals the rate at which the consumer is willing to substitute second-period consumption for first-period consumption. Use the following to answer questions 24-25: Exhibit: Budget Constraint 24.(Exhibit: Budget Constraint) Based on the graph, if Y1 and Y2 represent income in period one and period two, respectively, at which point along the budget constraint would a consumer be a borrower in period one? A) A B) B C) C D) D 25.(Exhibit: Budget Constraint) Based on the graph, if Y1 and Y2 represent income in period one and period two, respectively, r is the interest rate, and the consumer chooses to consume combination A on the budget constraint, what will be the level of consumption in period two, C2? A) Y1(1 + r) + Y2 B) Y1 + Y2/(1 + r) C) Y1/(1 + r) + Y2 D) Y1 + Y2(1 + r) 26.In the Fisher two-period model, the consumer achieves his or her optimum combination of current and future consumption by selecting: A) any combination on his or her highest indifference curve. B) the combination on his or her highest indifference curve that is tangent to his or her budget constraint. C) any combination on his or her budget constraint. D) the combination on his or her budget constraint in which period-one consumption equals period-one income and period-two consumption equals period-two income. 27.When the consumer has chosen his or her optimal values of first-period and second- period consumption, the marginal rate of substitution equals: A) 1 plus the interest rate r. B) 1 minus the interest rate r. C) 1 divided by the interest rate r. D) the interest rate r. 28.A normal good is a good that: A) provides pleasure. B) would generally be owned by an average household. C) has a value greater than zero. D) is desired in larger quantities by a consumer when his or her income rises. 29.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. 30.The behavior of consumers spreading increases in income earned in one period into increases in consumption over several periods is known as: A) random-walk consumption. B) transitory consumption. C) consumption smoothing. D) the income effect. 31.In Irving Fisher's two-period model, if consumption in both periods is a normal good, then an increase in income in period two