Question

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 periods. Consider initially that an individual is a borrower. If the interest rate increases:

a. The individual will never become a saver

b. The individual will always remain a borrower

c. The individual will be worse off, provided she remains a borrower

d. The individual can be better off, but only if she becomes a saver

e.Both c and d.

5. A Giffen good

a. Must be an inferior good

b. Must have a negative income effect

c. Must have an income effect that reinforces the substitution effect.

d. Must have a negative income effect that outweighs the pure substitution effect for the product.

e. a, b and d

6. Consider the inter-temporal model of consumption studied in class, with two possible periods. Which statement is true?

a. A consumer will never consume its endowment point (where c1 = m1 and c2 = m2)

b. An interest rate rise increases the maximum possible first period consumption level.

c. An interest rate rise always makes the individual better off.

d. A rise in the interest rate rotates the inter-temporal budget constraint around the point at which it cuts the c2 axis.

e. None of the above

7. Which statement is true?

a. An income effect always reinforces the pure substitution effect

b. An inferior good is always a Giffen good

c. The pure substitution effect requires that, with well-behaved preferences, the consumer buys more of the good that experienced the price fall

d.  An income effect is always positive, given well-behaved preferences.

e. none of the above

Answer 1

By virtue of intertemporal choice we divide our consumption level into several periods, given our income stream. Changes in the interest rate affects this decision making. Giffen goods are always inferior goods but the reverse is not true.

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