1.

The MPS plus the MPC must equal:

A) zero.
B) one.
C) income.
D) saving.

Use the following to answer question 2:

Figure: Consumption and Real GDP

2. (Figure: Consumption and Real GDP) If real GDP is $4 trillion, saving is _______ trillion.
A) $0.75
B) $1
C) $3
D) $4

Use the following to answer question 3:

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 3. (Table: Individual and Aggregate Consumption Functions) Which of the following
represents Fred's individual consumption function?
A) C = 100 + 0.7YD.
B) C = 100 + 0.5YD.
C) C = 150 + 0.8YD.
D) C = 0.80YD.

Use the following to answer question 4:

4. (Table: Income and Consumption) When disposable personal income is $300, the MPC is:
A) 0.80.
B) 0.92.
C) 0.95.
D) 1.00.

Use the following to answer question 5:

Scenario: Consumption Spending

Suppose that the consumption function is: C = $500 + 0.8 × YD, where YD is disposable income.

5. (Scenario: Consumption Spending) The marginal propensity to consume is:

A) $500.
B) 0.
C) 0.8.
D) 0.2.

6. When David has no income, he spends $500. If his income increases to $2,000, he spends
$1,900. Which of the following represents his saving function?
A) S = 1.2 × YD.
B) S = 0.95 × YD.
C) S = -$500 + 0.3 × YD.
D) S = $500 + 1,000 × YD.

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 7. If the aggregate consumption equals $100 million + 0.75 × YD, then the marginal propensity
to save is:
A) 0.75.
B) 0.25.
C) –$75 million.
D) –$100 million.

8. Consider the simple economy of Behr, whose government does not tax its citizens. The
saving function of Behr is given by: S = -500 + 0.20YD. The autonomous consumer
spending in this economy is:
A) 1,000.
B) 800.
C) 500.
D) not possible to calculate.

9. If disposable income increases by $1,000 and consumer spending increases by $800, then
the marginal propensity to consume is:
A) 0.8.
B) 1.
C) 1.25.
D) 0.75.

Use the following to answer question 10:

Scenario: Aggregate Consumption Equation

Suppose that the aggregate consumption function is given by the equation: C = 200 + 0.8YD, where C represents
consumption and YD represents disposable income.

10. (Scenario: Aggregate Consumption Equation) If disposable income increases from $500 to
$800, autonomous consumption is:
A) $0.
B) $200.
C) $240.
D) $440.

11. Suppose that the MPC = .75 and disposable income falls by $200. What will be the
resulting change in saving?
A) -$150
B) -$50
C) $50
D) $150

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12. Suppose that the saving function is S = -400+.4YD. What is the level of consumption
spending when YD = $2000?
A) $200
B) $400
C) $800
D) $1600

13. The life-cycle theory of consumption implies that:

A) the MPS out of a temporary change in income is very small.
B) the MPC out of permanent income is larger than the MPC out of transitory income.
C) an individual's MPC out of permanent income changes with age.
D) all of the above.

14. 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 plan their consumption and saving patterns to optimize the lifetime benefit from
their disposable income.
D) people adjust their current consumption constantly to keep a stable saving pattern over
their lifetime.

15. Suppose that a 45 year-old individual receives a raise of $10,000 and expects to work for
her current employer until she retires at the age of 70. Also suppose that she expects to
live to the age of 80. According to the LC-PIH, her annual increase in consumption will
be ________, and her annual increase in saving will be_________.
A) $286; $9714
B) $9714; $286
C) $7140; $2860
D) $2860; $7140

16. Suppose that a person receives a $5000 check as a retirement gift when he retires at the age
of 60. If he expects to live to the age of 90, his consumption that year should rise by
_________ and his saving that year should rise by ______, according to the LC-PIH.
A) $3335; $1665
B) $1665; $3335
C) $167; $4833
D) $4833; $167

17. According to the LC-PIH, a 35 year-old person who expects to work until the age of 65 and
live until the age of 85 shold have an MPS out of transitory income of _____ and an MPS
out of permanent income of:
A) 0.60; 0.02
B) 0.02; 0.60
C) 0.98; 0.40
D) 0.40; 0.98

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18. Suppose that a person's uninsured house burns down and $12,000 cash that was stuffed
under the mattress goes up in flames. If the person expects to work an additional 20 years
and live an additional 25 years, his change in consumption that year should be, according to
the LC-PIH:
A) -$12,000
B) -$9600
C) -$600
D) -$480

19. According to the LC-PIH:

A) temporary increases in income lead to proportionate increases in consumption and
saving
B) a person's consumption in any given year will be strongly affected by interest rate
changes
C) a rise in income affects consumption only after a delay of several years
D) none of the above

20. According to the LC-PIH, if individuals A and B have the same average annual income but
A's income fluctuates greatly from year to year while B receives an almost even flow of
income each year, then
A) A will spend less than B out of permanent income
B) A will weigh current income less heavily in making consumption decisions than B
C) B will weigh current income less heavily in making consumption decisions than A
D) none of the above

21. The Barro-Ricardo equivalence proposition

A) states that debt-financing merely postpones taxation and therefore in many instances is
equivalent to current taxation
B) implies that a cut in current taxes that carries with it an implied increase in future taxes
will lead to an increase in private saving
C) implies that an increase in current taxes that carries with it an implied decrease in future
taxes will lead to a decrease in private saving
D) all of the above

22. The sensitivity of current consumption to changes in current income can be explained by
A) myopia
B) the absence of liquidity constraints
C) the fact that consumers always realize when a permanent change in income has
occurred
D) none of the above

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