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QOD and On Call - Final Exam With Complete Solutions
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QOD and On Call - Final Exam With Complete SolutionsThe "w" in labor market graph stands for - ANSWER w = W/P = the real wage.
True or False. If wealth decreases, then the demand for labor increases. - ANSWER
False. If wealth decreases, the supply of labor increases. If workers want to purchase
the same number of goods, with lower wealthy, they now need higher income and would
work more.
If s = .01 and f = .19, then the natural rate of unemployment is: - ANSWER U rate = s/s+f x
100 = .01/(.01 + .19) x 100 = 1/20 x 100 = 5%
The intertemporal budget constraint tells us that: - ANSWER the present value of lifetime
consumption equals the present value of lifetime income.
If you expect to work for an additional 40 years from today, and expect to live for 10
years beyond that, and your income is $100,000 per year, then the life-cycle model
predicts that your consumption per year will be: - ANSWER 40($100,000)/50 = $80,000.
True or False. If wealth is above a desired level of wealth (precautionary savings), then
households will increase consumption. - ANSWER True. If wealth is higher than the
desired level, households do not need to save as much and can consume more.
Which of the following is NOT a reason why households save. - ANSWER Households
save because most consumers prefer to consume in the future rather than in the
present.
Most consumers prefer to consume now rather than later (impatient and need to be
rewarded for foregone consumption).
Investment is less volatile than consumption because firms prefer to smooth their
, investment spending. - ANSWER False. Biologically, humans need to smooth
consumption (food, clothing, shelter) to live, whereas firms do not, so consumption
spending is less volatile than investment.
True or False. The permanent income hypothesis and the life cycle hypothesis both
predict that households will smooth consumption when there are deviations in income,
but income can deviate at any time from the average in the permanent income
hypothesis, whereas the deviations in income come at certain parts of a person's life in
the life-cycle model. - ANSWER True. The PIH states that C = mpc* YP, where YP is the
average income of all the possible income levels at any point in life. The L-CH states that
households borrow when they are young and earn low income, save in mid-life when
income is high, and draw down on savings when old and retired.
True or False. An increase in the real interest rate will lead to a decrease in present
consumption. - ANSWER True. The substitution effect shows that the opportunity cost or
price of present consumption (which is foregone future consumption) increases as the
real interest rate r rises. That is, a consumer is giving up more interest income that
could be used to purchase future consumption as the real interest rate rises, so present
consumption would decrease. The income effect depends on if the household is a lender
(income would increase, so present C could increase) or a borrower (income would
decrease, so C would decrease). The net effect though would have C decreasing as r
increases.
If wealth is above a desired level of wealth (precautionary savings), then households will
increase consumption. - ANSWER True. If wealth is higher than the desired level,
households do not need to save as much and can consume more.
Do firms always act rationally? - ANSWER No, firms can be overtaken by periods of
irrational optimism or pessimism that Keynes called "animal spirits."
Which of the following would result in an increase in the desired level of capital, K*? -
ANSWER An increase in the expected marginal product of capital, MPKe.
Which of the following statements about Tobin's q is TRUE? - ANSWER - A firm's q value
is a signal from participants in the financial markets about whether it is profitable for the
firm to acquire more capital goods and use them to expand production.
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