C1 is present consumption
C2 is future consumption
Y1 is the present endowment
Y2 is the future endowment
r is the real interest rate between the present and the future
Ω is wealth
Which of the following equations is not the household's intertemporal budget constraint?
a) 0 = (Y1 - C1) + (Y2 - C2 )/(1+r)
b) C1 + C2/(1+r) = Ω
c) Y1 +Y2/(1+r) = Ω
d) C1 + C2/(1+r) =Y1 +Y2/(1+r)
#0 = (<i>Y</i><i><
Question 2
Point A represents the endowments of Crusoe for today and tomorrow and the real interest rate is r .
Crusoe's wealth is equal to...
a) OB
b) DB
c) OY1+OY2.
d) The area of the rectangle OY1AY2.
#<i>OB</i>#<i>DB
Question 3
In a two-period world where firms can invest K in the present period in order to produce F(K) in the
future period, if the real rate of interest is r, then the net return from investing K would be equal to:
a) F(K)/(1+r) minus K
b) F(K) minus K/(1+r)
c) F(K) minus K
d) K times (1+r)
#<i>F</i>(</i><i>K<
Question 4
The reason that it does not matter whether a firm uses debt (borrowing) or equity (own saved funds)
to finance its investment plans is...
a) ...that Ricardian equivalence fails.
b) ...that in a global world it is always possible for a nation to borrow abroad.
c) ...that a Ponzi-scheme is necessary so the firm is indifferent.
d) ...that firms belong to their shareholders and the net return from investment raises their wealth.
#...that Ricardian e
Question 5
Consider the current government budget, where:
T1 is today's net taxes.
D1 is government debt at the start of today.
G1 is today's government spending.
rG is the real interest rate paid on government debt.
All variables are positive.
The government is running a deficit today, if
a) G1 - T1 > 0
b) D1 (1+ rG) > T1 - G1
c) rGD1 > T1 - G1
d) (G1+ D1) rG - T1> 0
#<i>G</i><i><sub>
Question 6
Suppose the market interest rate is equal to 5%. The price of a bond that promises one payment of
€100 in one year would be equal to:
a) € 100.00 - € 5.00
b) € 100.00
c) € 100.00 + € 5.00
d) € 100 ÷ 1.05
#€ 100.00 - € 5.00#
Question 7
The difference between a nation's current account surplus and its primary account surplus is its …
a) … net asset position with respect to the rest of the world.
b) … net investment income from abroad.
c) … balance of payments
d) …net sovereign borrowing
Question 8
If, for Crusoe's current intertemporal consumption pattern (satisfying his intertemporal budget
constraint), his marginal rate of intertemporal substitution is 1 and the real rate of interest is positive,
then…
a) …the interest rate will fall to zero.
b) …Crusoe could increase his lifetime utility by consuming more today.
c) …Crusoe could increase his lifetime utility by consuming less today.
d) …Crusoe is necessarily a borrower.
#…the interest rate
Question 9
What is the permanent income that corresponds to present value of the two period income path
Y1=100, Y2=125 for the real interest rate r=.5? Note: 50% not ½%!
a) 110
b) 112
c) 114
d) 116
#110#112#114#11
Question 10
Crusoe begins with an endowment A. Point R is the consumption combination he would choose at
real interest rate r and point R´ is the consumption combination he would choose at real interest rate
r´.
Which of the following statements is true?
a) Crusoe is a lender today.
b) Crusoe's wealth has decreased because of the change in the real interest rate.
c) The marginal rate of intertemporal substitution at R is equal to r.
d) The change in interest rate does not decrease Crusoe's utility since he is free to keep his
original endowment A if he so chooses.
#Crusoe is a lende
Question 11
There are strong theoretical reasons to expect that changes in wealth are responsible for changes in
consumption, nonetheless one reason that we observe a tight link between consumption and
disposable income is…
a) …credit rationing changes the intertemporal budget constraint for borrowers.
b) …households attempt to smooth their consumption.
c) …household saving provides a buffer between income and expenditure.
d) …Ricardian equivalence.
#…credit rationing
Question 12
The accelerator principle states:
a) If an increase in the growth of output is expected, investment will increase.
b) If an increase in investment is expected, output will increase.
c) If an increase in the growth of investment is expected, output will increase.
d) Small swings in investment are associated with large swings of output.
#If an increase in th
Question 13
Which of the following factors does Tobin's q ratio not reflect:
a) …marginal rate of intertemporal substitution
b) …the "animal spirits" of entrepreneurs.
c) …the link between anticipated future productivity increases and current share prices.
d) …the interest rate.
#…marginal rate o
Question 14
The optimal capital stock is achieved when the user cost of capital is equal to
a) …the interest rate
b) …the depreciation rate
c) …the marginal product of capital
d) …Tobin's q