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Short Answer Questions (from textbook)
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Short Answer Questions (from textbook)
• We can use Jill’s intertemporal budget constraint
to derive interest rate r.
Jill borrowed $100 for consumption in the 1st
period and in the 2nd period used her $210
income to pay $100 (1+r) on the loan and
consume the remained.
C1 + C2/(1+r) = Y1 + Y2/(1+r)
100 + 100/(1+r) = 0 + 210/(1+r)
100(1+r) = 210 – 100
r = 10%
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Short Answer Questions (from textbook)
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Short Answer Questions (from textbook)
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Short Answer Questions (from textbook)
C2 C2
A B
Y2 Y2
B I2
A I1
I2
I1
Y1 Y1+ΔY C1 Y1 Y1+ΔY C1
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Short Answer Questions (from textbook)
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Short Answer Questions (from textbook)
C2 C2
Y2+ΔY Y2+ΔY B
B
A
A I2
Y2 I2 Y2
I1 I1
Y1 C1 Y1 C1
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Short Answer Questions
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Short Answer Questions
Answer:
According to the life-cycle model, Jan’s
consumption function can be written as follows if
she wishes to achieve the smoothest possible path
of consumption over her lifetime:
C = (1/T)W + (R/T)Y
where T = 25 and R = 10. Thus
C = (1/25)W + (10/25)Y
= 0.04W + 0.4Y
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Short Answer Questions
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Multiple-Choice Questions
(2005 Exam Question)
(1) According to the Keynesian theory of
consumption, when individuals experience an
increase in their income their:
b. consumption will rise by the total amount of the
increase in income.
c. consumption will rise by less than the increase
in income.
d. average propensity to consume will increase.
e. marginal propensity to consume will increase.
Answer: b.
Hint: P433. 14
Multiple-Choice Questions
(2005 Exam Question)