Question

(35) Which of the following is LEAST likely to be a large-scale USE of borrowed funds by businesses? (a) capital expenditures; (b) financing of mergers and acquisitions; (c) repayment of revolving credit; (d) share buybacks and dividend payouts.

(37) From among the following, a simplified examination of funding for investment suggests that the most expensive source typically is: (a) retained earnings; (b) bond issuance; (c) credit in the form of bank loans; (d) issuance of new shares of stock.

(38)  In the early stages of an economic boom, a borrower’s risk is likely to be: (a) related to deflation; (b) due to sub-par food in the cafeteria; (c) due mainly to the solvency of the lender; (d) relatively low.

(39) Of the following, which is LEAST likely to be a consideration in determining the rate of return on investment necessary to validate a capital investment? (a) the rate of depreciation of the capital good purchased; (b) consumer confidence; (c) the rate of business profit taxation; (d) the present value of the future stream of returns.

(40)  According to the permanent income hypothesis, current consumption is a function of: (a) current income, only; (b) expected income over a three-year time horizon; (c) wealth, including human capital; (d) all of the above.

Answer 1

40) Answer: Option (d) All of the above

Permanent income hypothesis suggests that people formulate expectations about a long term permanent level of income. It also suggests that income has permanent as well as transitory components. Permanent income consists of not just an expected long term level of income, but also wealth in general. Since human capital can be thought of as a method of generating income , this can also be considered a part of wealth and a part of permanent income.

Depending on the permanent and current income level, people take their current consumption decisions. That is, if people find that their current level of income is relatively greater than their expected permanent income level, then they would decide to save and hence consume less. If the current income is lesser , they would not save or might engage in dissavings and thereby consume more. Current consumption increases with increase in  income both (permanent and transitory).

Thus current consumption is a function of current income, expected income over a three year time horizon, and wealth including human capital.