Question

- Use the "Theory of intertemporal choice" model in order to
analyse the effect of the following on consumption and saving:
- A decrease in disposable income at period 2.
- An increase in the interest rate for a consumer with negative saving.
- A decrease in the interest rate for a consumer with positive saving.

Answer #1

So, a decrease in disposable income of period 2 leads to decrease in both current and future consumption. Savings will also increase.

An increase in the interest rate when consumer have negative saving (i.e) he is a borrower leads to decrease in his current consumption and increase in saving.

A decrease in the interest rate when consumer have positive savings (i.e) he is a lender leads to decrease in his future consumption only.

(Intertemporal Choice )Consider a consumer whose preferences
over consumption today and consumption tomorrow are represented by
the utility function U(c1,c2)=lnc1 +?lnc2, where c1 and c2 and
consumption today and tomorrow, respectively, and ? is the
discounting factor. The consumer earns income y1 in the first
period, and y2 in the second period. The interest rate in this
economy is r, and both borrowers and savers face the same interest
rate.
(a) (1 point) Write down the intertemporal budget constraint of...

using the bond market model(and the portfolio choice theory if
needed),analyze the effect of each of the following events on
interest rates on bonds (in the US for part c) if possible draw
graphs
a) a decrease in expected inflation
b)an increase in the federal government budge deficit
c)an increase in interest rate in Europe
d)an economic boom (expansion)

Which of the following best describes the "interest rate
effect"?
An increase in the price level raises the interest rate and
chokes off government spending.
An increase in the price level lowers the interest rate and
chokes off investment and consumption spending.
An increase in the price level lowers the interest rate and
chokes off government spending.
An increase in the price level raises the interest rate and
chokes off investment and consumption spending.
If the marginal propensity to consume...

Which of the following best describes the "interest rate
effect"?
An increase in the price level raises the interest rate and
chokes off government spending.
An increase in the price level lowers the interest rate and
chokes off investment and consumption spending.
An increase in the price level lowers the interest rate and
chokes off government spending.
An increase in the price level raises the interest rate and
chokes off investment and consumption spending.
If the marginal propensity to consume...

Which of the following best describes the "interest rate
effect"?
An increase in the price level raises the interest rate and
chokes off government spending.
An increase in the price level lowers the interest rate and
chokes off investment and consumption spending.
An increase in the price level lowers the interest rate and
chokes off government spending.
An increase in the price level raises the interest rate and
chokes off investment and consumption spending.
If the marginal propensity to consume...

1.Which of the following is a true statement about the
multiplier? *
The multiplier effect does not occur when autonomous
expenditures decrease
The multiplier is a value between zero and one
The smaller the MPC, the larger the multiplier
The multiplier rises as the MPC rises
2.According to the Keynesian model of the macroeconomic, the
most effective means for closing a recessionary gap is *
Decrease in marginal tax rates which shift SRAS
Increases in government spending which shift AD...

(1) A given change in disposable income would have the greatest
effect on saving with which of the following marginal propensities
to consume?
Group of answer choices
0.4
0.1
0.8
0.2
(2)
If Pat's income increased from $250,000 to $500,000 and his
consumption increased from $200,000 to $400,000, what was his
marginal propensity to save?
Group of answer choices
0.4
0.6
0.8
0.2
(3)
If consumers spend
_____ of a change in their disposable income, then a tax increase
of...

a. Consider a household living for two periods. The
intertemporal budget constraint is given by:
?1 + /?2/1+r =
?1 + /y2/1+r ,
where ? is consumption, ? is income and ? is the interest rate.
The household’s preferences are characterised by the utility
function.
?(?1, ?2 ) = ln ?1 + ? ln
?2,
where ? < 1 is the discount factor. Derive the Euler
equation.
b. Consider the bathtub model of unemployment. Let ? denote the
constant labour...

In the classical model, what is the effect of an increase in
government spending that is not financed by an increase in taxes
(an increase in the deficit)? How do prices, real GDP, consumption,
saving, investment spending, and real interest rates change as a
result of the increase in government spending? Explain and show
graphically.
(Hint: Use the market for loanable funds model.)

2.Consider the inter-temporal model of consumption studied in
class, with two possible periods. Assume that initially that an
individual is a saver. If the interest rate rises, which statement
is false?
a. The individual will never become a borrower.
b.The individual will necessarily increase their savings.
c.The individual must remain a saver
d. The individual could increase or decrease their savings, but
she must remain a saver.
4. Consider the inter-temporal model of consumption studied in
class, with two possible...

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