Question

Suppose an individual experiences a $20,000 increase in real yearly income and the individual believes this...

Suppose an individual experiences a $20,000 increase in real yearly income and the individual believes this increase in income is permanent. Economic theory suggests that this individual’s current yearly consumption will

(a) remain unchanged.

(b) increase by more than $20,000.

(c) increase by at most $20,000.

(d) decrease or remain unchanged, depending on the value of the real interest rate.

(e) decrease, remain unchanged, or increase, depending on the value of the real interest rate

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

OPTION C - increase by at most $20,000

Reason

According to the Marginal Propensity to Consume (MPC), change in consumption as divided by change in income is equal to ONE. It means that increase/decrease in consumption cannot be greater than increase/decrease in income. Hence, if an individual experiences an increase in income to the extent of $20,000, then as per MPC Concept of Economic Theory, his current yearly consumption will increase by at most $20,000.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
(Classical theory) Suppose that saving is totally inelastic with respect to the real interest rate. Consumption...
(Classical theory) Suppose that saving is totally inelastic with respect to the real interest rate. Consumption depends on disposable income. (5x3=15) Discuss the effect of an increase in tax on investment and real interest rate. What is the effect of an increase in investment demand on saving and real interest rate? Explain the effect of an equal increase in tax and government expenditure on investment and real interest rate.
a) What are the two channels through which an increase in the real interest rate affects...
a) What are the two channels through which an increase in the real interest rate affects consumption decisions? (b) Suppose your income in year 1 is $1,000 and in year 2 it increases to $1,100. If you choose your income following the PIH how much should you consume in each year? (c) Show graphically what happens to consumption after a fall in permanent income using the indifference curve/budget constraint graph. (d) Show what happens to the consumption demand curve after...
Suppose that everyone's income fell nationwide and the central bank decided to purchase bonds. According to...
Suppose that everyone's income fell nationwide and the central bank decided to purchase bonds. According to the Liquidity Preference Theory and everything else held constant, this would cause the nominal interest rate to _____. Select one: a. either increase, decrease, or remain constant b. remain constant c. decrease d. not be affected e. increase
Jane lives two periods. Her income in the current period is ?=500, her income in the...
Jane lives two periods. Her income in the current period is ?=500, her income in the future period is yf=660 and her real wealth at the beginning of the current period is ?=100. The real interest rate is ?=0.1 or 10%. Also, Jane wants her current consumption to be 2.5 times greater than her future consumption. a. Compute the present value of Jane’s lifetime resources (PVLR). b. Determine the optimal values for Jane’s current consumption ( c ), current saving...
Suppose the yield on a ten-year U.S. Treasury note was 2.05% on April 2nd, 2018. Now...
Suppose the yield on a ten-year U.S. Treasury note was 2.05% on April 2nd, 2018. Now suppose that the next morning you read the following headline in the Wall Street Journal: “Republican Leadership in Congress Will Not Shut Down Government Over Debt Limit.” Further suppose that bond traders interpret the increase in the federal debt ceiling as a decrease in the default risk associated with U.S. Treasury securities. Ceteris paribus, it follows that the yield on the ten-year note will...
1. As a large number of students graduate from college, which category of unemployment would increase?...
1. As a large number of students graduate from college, which category of unemployment would increase? Group of answer choices a. Potential unemployment b. Cyclical unemployment c. Structural unemployment d. The graduating students will have no effect on unemployment e. Frictional unemployment 2. If an economy experiences a positive demand shock, the appropriate monetary policy would be to Group of answer choices a. More than one of these is the correct answer b. Decrease government expenditures c. Increase government expenditures...
a. An increase in your nominal income and a decrease in your real income might occur...
a. An increase in your nominal income and a decrease in your real income might occur simultaneously if your real income increases at the same rate as the cost of living increases. nominal income increases less than the cost of living increases. real income increases more than the cost of living increases. nominal income increases more than the cost of living increases. b. The losers from inflation are those with significant debt. incomes that increase at the rate of inflation....
13. Suppose there is an increase in government spending in a closed economy. In medium-run such...
13. Suppose there is an increase in government spending in a closed economy. In medium-run such a fiscal policy will cause: none of the other answers is correct. ambiguous effects on the neutral real interest rate the nominal wage to rise no change in the neutral real interest rate the neutral real interest rate to rise 14. Suppose the economy is initially in the steady state. According to Solow model without technological progress, an increase in the depreciation rate (δ)...
QUESTION 1 Total output in the economy is equivalent to: A. total (real) income in the...
QUESTION 1 Total output in the economy is equivalent to: A. total (real) income in the economy. B. total consumption expenditure in the economy. C. total investment expenditure in the economy. D. none of the above. 10 points    QUESTION 2 In the classical model, because of full employment, real interest rate is A. a fixed number. B. determined in the labor market equilibrium. C. determined in the goods market equilibrium. D. none of the above. 10 points    QUESTION...
Suppose your current income is $80,000, and your future income is 110,000. The interest rate= 0.1....
Suppose your current income is $80,000, and your future income is 110,000. The interest rate= 0.1. 1.What is the present value of your life time income? 2.What is the future value of your lifetime income? 3. What is the slope of the intertemporal budget constraint? 4. If your MRTP at your current consumption is 1.05 then you should: Select one: a. You should save money to spend more in the future b. You should borrow money to spend more today...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT