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2 Micro-Foundations of Aggregate Consumption - Question

This document contains a tutorial on macroeconomic concepts related to aggregate consumption. It includes 10 multiple choice questions that test understanding of key theories like permanent income theory and life cycle theory of consumption. These theories posit that (1) consumption is determined by permanent rather than transitory income and (2) people plan their consumption and saving over their lifetime to maximize lifetime utility. The questions provide scenarios to apply these theories, like how much different individuals should consume annually given certain earnings and retirement parameters.

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22 views3 pages

2 Micro-Foundations of Aggregate Consumption - Question

This document contains a tutorial on macroeconomic concepts related to aggregate consumption. It includes 10 multiple choice questions that test understanding of key theories like permanent income theory and life cycle theory of consumption. These theories posit that (1) consumption is determined by permanent rather than transitory income and (2) people plan their consumption and saving over their lifetime to maximize lifetime utility. The questions provide scenarios to apply these theories, like how much different individuals should consume annually given certain earnings and retirement parameters.

Uploaded by

tookshirli
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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ECO 287 Macroeconomics II

Tutorial 2 – Micro-foundations of Aggregate Consumption

1) Consumption is an important element of aggregate demand because it


A) is the most volatile component of GDP
B) accounts for roughly 70 percent of GDP
C) is very interest sensitive
D) is greatly affected by stock market activity
E) all of the above

2) The permanent-income theory of consumption implies that


A) the short-run multiplier is smaller than the long-run multiplier
B) the short-run multiplier is larger than the long-run multiplier
C) the short-run multiplier is identical to the long-run multiplier
D) the long-run multiplier is equal to 1
E) the short-run multiplier is less than 1

3) According to the simplified life-cycle theory of consumption, a retired person with zero
income from labor would
A) only consume the interest on accumulated wealth
B) consume a fraction of accumulated wealth based upon her/his life expectancy
C) have to decrease consumption sharply to not run out of funds too soon
D) expect to be financially supported by her/his children
E) consume more than during her/his working years since she/he does not expect to live much
longer

4) According to the life-cycle theory of consumption, an individual's


A) MPC out of wealth is fairly large
B) MPC out of labor income increases with an increase in age until it becomes zero at the
retirement age
C) MPC out of transitory income is fairly small
D) level of consumption will decrease if her/his retirement age increases
E) none of the above

5) The life-cycle theory of consumption can be summarized as follows:


A) retired people need less so they can save more than working people
B) people want instant gratification and seldom worry about the future
C) people always tend to consume almost all of their current income
D) people plan their consumption and saving patterns to optimize the lifetime benefit from their
disposable income
E) people adjust their current consumption constantly to keep a stable saving pattern over their
lifetime
6) If you are age 20, have no accumulated wealth, and have an expected average annual income
of $36,000, how much should you consume each year if you want to retire at age 65 and expect
to live until age 80? You desire to leave no estate and to consume an equal amount in each of the
next 60 years.
A) $36,000
B) $31,000
C) $27,000
D) $22,000
E) $20,000

7) Assume a worker at age 25 with annual earnings of $45,000 who wants to retire at age 65 and
expects to live until age 75. How much would the worker consume annually?
A) $40,000
B) $36,000
C) $32,000
D) $30,000
E) $28,000

8) According to the permanent-income theory, which of the following would have the greatest
impact on the current consumption of a 45 year-old tenured college professor?
A) a promotion to full professor combined with a $5,000 raise
B) a $5,100 advance payment for a book that will take two years to write
C) winning $5,200 in the Reader's Digest Sweepstakes
D) a loss of a stamp collection worth $5,400
E) an inheritance of $5,500 from a distant uncle

9) If a worker gets a large one-time Christmas bonus, which of the following is most likely to
occur?
A) family consumption will increase substantially in the year
B) permanent family income will increase substantially
C) transitory family income will not be affected
D) family saving will increase in the year
E) all of the above

10) According to the permanent-income theory of consumption, which of the following options
are you most likely to choose from to spend the $25,000 that you just won on a TV game show?
A) travel to Europe and eat in the best restaurants
B) host a lavish party for your friends
C) put the money in a bank to finance your next year in college
D) take a trip to Las Vegas to try and double your winnings
E) none of the above

Conceptual Problem
1. Suppose that you and your neighbor both work the same number of years until retirement and
you both have the same annual income but you are in much better health and expect to live
longer than she does. Would you consume more or less than she does? Explain your answer.
Derive your answer using the equation from text, C= (WL/NL) x YL.

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