ECO 302 Week 5 Quiz Strayer
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Chapters 6 and 7
Chapter 6
TRUE/FALSE
1.Bond holdings and interest income are zero for the whole
economy.
2.The household real budget constraint shows that household real
consumption is equal to household real income plus household real
saving.
3.In the Barro model prices like the real wage adjust to clear
markets like the labor market.
4.In the Barro model the nominal rate of return on capital,
(R/P) - is greater than the nominal return on bonds, i, because
capital is viewed by households as more risky than bonds.
5.Real profit equals real output plus spending on capital and
labor inputs.
6.In the bond market, a higher interest rate means that
borrowing is less expensive than before.
7.Household decisions depend on the nominal values for wages and
rent rather than the real values for wages and rent.
8.In the Barro model, households use money as a means for
trading goods and services.
9.In the Barro market model, gold serves as money.
10.The market-clearing interest rate depends on the marginal
productivity of capital.
MULTIPLE CHOICE
1.The market clearing approach assumes that:a.people are not
able to affect prices that influence their decisions.c.firms are
not able to affect prices that influence their decisions. b.prices
adjust to clear markets. d.all of the above.
2.The market clearing approach assumes that:a.people are not
able to affect prices that influence their decisions.c.firms are
able to affect prices that influence their decisions. b.prices
change very slowly.d.all of the above.
3.The market clearing approach assumes that:a.people are able to
affect prices that influence their decisions.c.firms are able to
affect prices that influence their decisions. b.prices adjust to
clear markets. d.all of the above.
4.The market clearing approach assumes that:a.people are able to
affect prices that influence their decisions.c.firms are not able
to affect prices that influence their decisions. b.prices change
very slowly. d.all of the above.
5.The labor market clears when:a.the real wage causes LS =
LD.c.the marginal product of labor is zero.b.the real wage causes
LS to be minimized. d.the real wage causes LS to be as large as
possible.
6.In the goods market in the Barro model households can
buy:a.bonds.c.labor services. b.goods to increase their stock of
capital.d.all of the above.
7.The goods market the price, P, is:a.the price level. c.the
price of a particular good. b.the rental price of goods. d.the
interest rate.
8.In the rental market in the Barro model, households buy and
sell:a.real estate. c.the use of capital for one period.b.consumer
durables like cars.d.all of the above.
9.A bond that is traded in the bond market in the Barro model is
piece of paper that:a.is the lenders claim to the amount owed by
the borrower. c.is the lenders claim to ownership in the company.
b.is the borrowers claim to the amount owed by the lender.
d.assures the person is who they say they are.
10.Money in the Barro model is held because:a.for its own sake.
c.to earn interest. b.to trade fairly soon for something else.d.all
of the above.
11.Money in the Barro model is:a.gold.c.interest earning. b.a
medium of exchange. d.all of the above.
12.One unit of money in the Barro model has a purchasing power
of:a.the price level time that one unit, P.c.the interest rate,
i.b.the price level over the interest rate, (P/i).d.one over the
price level, (1/P)
13.If a household has $2,000 in money and the price level is 10,
then the real value of its money is:a.$10.c.200 goods.
b.$20,000.d.1,900 goods.
14.The real wage is:a.hourly earning after taxes. c.the value of
a workers time in goods received.b.wages plus fringe benefits.
d.the price level divided by the nominal wage rate.
15.If the nominal wage rate is $10 per hour and the price level
is 2, then the real wage a worker earns is:a.five units of goods
per hour.c.twenty units of goods per hour. b.eight units of goods
per hour. d.one-fifth unit of goods per hour.
16.If the rental price of a capital good is $100 and the price
level is 25, then when renting the capital the owners real earnings
are:a.4 units of output per period.c.seventy five units of output
per period.b.2,500 units of output per period. d.one-forth unit of
output per period.
17.The rental price of capital is:a.a dollar amount per unit of
capital.c.a nominal interest rateb.a real interest
rate.d.profit.
18.Over all households bonds, B, must total zero because:a.there
are no bonds in the model.c.bonds are not important in the model.
b.for every dollar loaned a dollar is borrowed in the bond market.
d.bonds are illegal in most economies.
19.The profit in the model is:a.output - (wages times labor
hired + the rental price times capital rented).c.(price times
output) - (wages times labor hired + the rental price times capital
rented).b.(price times output) divided by (wages times labor hired
+ the rental price times capital rented).d.(wages times labor hired
+ the rental price times capital rented) - (price times
output).
20.The rate of return from owning capital is:a.the rental price
of capital, R.c.the net nominal rental income, (R/P)PK - PK.b.the
value of depreciation, PK.d.the real rental price less
depreciation, (R/P) - .
21.The principal of a bond is:a.the amount of interest paid each
period. c.the amount of interest paid over the term of the
bond.b.the initial amount borrowed. d.the total amount to be paid
back including the amount borrow and the amount of interest paid
over the term of the bond.
22.The maturity of a bond is:a.the amount of interest paid each
period. c.the amount of interest paid over the term of the
bond.b.the amount borrowed.d.the time at which the lender must be
paid back.
23.If the principal of a bond is $100, it matures in a year and
the interest rate is 4%, then at the interest payment on this bond
will be:a.$100.c.$4.b.$96.d.$400.
24.If the principal of a bond is $1000, it matures in a year and
the interest rate is 6%, then at the end of the year the lender
will receive:a.$1000.c.$60.b.$1060.d.$940.
25.In the market clearing model, for the whole economy interest
income is:a.bonds minus the interest rate.c.the interest rate
divided by bonds.b.zero. d.bonds divided by the interest rate.
26.Individual household nominal income includes:a.nominal
interest income, iB.c.nominal wage income, wL.b.nominal net rental
income, [(R/P) - PK]PK.d.all of the above.
27.In the model the nominal interest rate equals the nominal net
return on capital, i = (R/P) - , because:a.other than rates of
return bonds and capital look the same to households as assets.
c.bonds are riskier than capital.b.capital is riskier than bonds.
d.bonds are zero in the aggregate.
28.In the model the nominal interest rate equals the nominal net
return on capital, i = (R/P) - , because:a.bonds are zero in the
aggregate.c.bonds are riskier than capital.b.capital is riskier
than bonds. d.if bonds offered a higher return than capital
households would hold no capital.
29.According to the household nominal budget constraint, PC+ B+P
K = + wL + i(B + PK), households can use their income to:a.purchase
consumption goods. c.purchase capital goods.b.acquire more
bonds.d.all of the above.
30.Interest income is:a.positive for net bond holders.
c.negative for net bond issuers. b.zero for the whole economy.
d.all of the above.
31.According to the household nominal budget constraint, PC+ B+P
K = + wL + i(B + PK), households can use their income to:a.purchase
consumption goods. c.acquire more money.b.hire more workers.d.all
of the above.
32.According to the household nominal budget constraint, PC+ B+P
K = + wL + i(B + PK), households can use their income to:a.acquire
more money.c.pay more wages. b.acquire more bonds.d.all of the
above.
33.According to the household nominal budget constraint, PC+ B+P
K = + wL + i(B + PK), households can use their income to:a.hire
more workers. c.purchase capital goods.b.acquire more money.d.all
of the above.
34.If a household this week produces 20 of its product at a cost
of 50 cents each, sells them for $1, works 40 hours at $10 per
hour, must pay $10 in interest owed on its borrowing and rents out
10 units of capital at $100 for the week, the households, nominal
income is: a.$1,440 this week. c.$1,420 this week.b.$1,400 this
week.d.none of the above.
35.The household real budget constraint C + ( B/P) + K = ( /P)+
(w/P)L + i((B/P) + K).shows that in our model: a.households get
income only from labor.c.households can spend their income only on
consumption.b.households can spend their income on consumption or
acquiring more capital and bonds. d.households view bonds as
riskier than capital.
36.The households budget constraint shows that:a.sources of fund
= uses of funds.c.labor income is the largest part of
income.b.profits are the largest part of incomed.consumption is the
largest part of spending.
37.The household real budget constraint C + ( B/P) + K = ( /P) +
(w/P)L + i((B/P) + K).shows that in our model: a.households get
income only from labor.c.households get income from profits from
production, labor and interest on bonds and capital.b.households
can spend their income only on consumption.d.households view bonds
as riskier than capital.
38.To maximize profit a firm should hire labor:a.until it can
produce no more of its product. c.until the marginal product of
labor equal the real wage rate.b.until the marginal product of
labor begins to fall. d.until the marginal product of labor is
zero.
39.An investment in the Barro model is:a.the purchase of a
bond.c.the purchase of a capital good used for production.b.the
purchase of ownership in a firm.d.all of the above.
40.To maximize profit a firm should hire capital:a.until it can
produce no more of its product. c.until the marginal product of
capital equal the real rental price of capital.b.until the marginal
product of labor begins to fall. d.until the marginal product of
capital is zero.
41.In the market for capital services:a.the supply of capital
adjusts to create market clearing. c.the demand for capital adjusts
to create market clearing. b.the real rental price of capital
adjusts to create market clearing. d.all of the above.
42.In the market clearing model, depreciation, , is:a.the rate
at which capital disappears.c.the rate at which bonds lose
value.b.the rate at which money loses value. d.all of the
above.
43.In the market clearing model:a.households can owe pay
interest.c.for the whole economy interest income is
zero.b.households can earn interest.d.all of the above.
44.In the market clearing model, nominal saving is: a.the change
in money + the change in bonds + the change in the nominal value of
capital.c. + wL + i(B + PK) - PC.b.nominal income less nominal
consumption.d.all of the above.
45.In the market clearing model, nominal saving is: a.the change
in money + the change in bonds.c. + wL + i(B + PK) - PC.b.nominal
income plus nominal consumption.d.all of the above.
46.In the market clearing model, nominal saving is: a.always
zero.c.nominal income - depreciation of capital. b.nominal income
less nominal consumption.d.all of the above.
47.In the market clearing model, nominal saving is: a.the change
in money + the change in bonds + the change in the nominal value of
capital.c.always zero.b.nominal income plus nominal saving.d.all of
the above.
48.Real saving is:a. + wL + i(B + PK) - PC.c.( /P) + (w/P)L +
i((B/P) + K) - C.b.output plus consumption.d.all of the above.
49. Figure 6.1
In Figure 6.1 an increase in real income is shown by:a.a shift
of the curve up and to the right. c.a shift of the curve inward and
to the left.b.rotating the curve out the real consumption axis.
d.rotating the curve up the real saving axis.
50.In the market clearing model, the demand for capital and
labor come from:a.the tastes of people.c.the objective of profit
maximizing. b.rental and labor markets. d.all of the above.
51.In the goods market, production of goods comes froma.large
corporate firms.c.households.b.technology-related
businesses.d.large partnerships.
52.Households buy goods on the goods market because they wish
toa.consume.c.export.b.invest.d.both (a) and (b).
53.Households provide to the rental marketa.all available
capital services, so that no capital remains idle.c.none of their
capital services, since households do not own capital.b.some of
their capital services, leaving a fraction of capital idle.d.none
of their capital services, so that only businesses own capital.
54.In the Barro market model, currency is useda.to earn interest
income.c.only in the bond market.b.as a medium of exchange.d.only
in the labor market.
55.Households earn interest froma.holding bonds and holding
money.c.holding bonds, but not from holding money.b.holding money,
but not from holding bonds.d.none of the above.
56.To simplify the analysis of the bond market, the Barro bond
market model initially assumes thata.each bond has a different risk
level.c.bond maturities are long.b.a bond has no principal
amount.d.the inflation rate is zero.
57.A household views the real rental price for capital (R/P)
asa.the rate of return on capital only after it is adjusted for
depreciation.c.the profit from its production of goods and
services.b.the rate of return on capital only after it is adjusted
for inflation.d.the profit from its holdings of bonds and
money.
58.In the Barro markets model, the medium(s) of exchangea.is
bonds.c.are both bonds and money.b.is money.d.are bonds, money, and
labor services.
59.If bonds offer a higher rate of return than capital does,
then households woulda.hold neither bonds nor capital.c.hold bonds
only.b.hold capital only.d.hold both bonds and capital.
60.In the market for capital services, if the real rental price
is below the market-clearing rental price, thena.suppliers of
capital services would compete by bidding down the real rental
price.c.the market for capital services would be in
equilibrium.b.suppliers of capital services would compete by
bidding up the real rental price.d.demanders of capital services
would compete by bidding up the real rental price.
SHORT ANSWER
1.How is profit calculated in the model?
2.What is the household real budget constraint and what does it
tell us?
3.In the model why does the return on bonds, i, equal the return
on capital, (R/P) - ?
4.What is real profit in the Barro model?
5.What causes the labor and capital markets to clear in the
Barro model?
6.In the Barro market-clearing model, on what variable does the
interest rate depend? Explain briefly.
7.Why does the Barro model assume that the labor and capital
market clear? Explain briefly.
8.In the Barro market model, why are equilibrium profits equal
to zero?
Chapter 7
TRUE/FALSE
1.If the value of initial assets increases, then a household
will change consumption or present value of asset at the end of
period 2 due to an income effect.
2.$100 a year from now is equal in worth to $100 today.
3.A discount factor is used to deflate nominal consumption to
real consumption.
4.If wages rises by $10 per worker just this period, we would
expect to see consumption rise by much less than $10 this
period.
5.The aggregate household budget constraint is consumption plus
net investment is real GDP less depreciation.
6.In the multiyear household budget constraint, wage incomes
from each year are added together without further adjustments.
7.In the multiyear household budget constraint, initial asset
values are excluded.
8.An increase in the interest rate leads to an income effect and
an intertemporal-substitution effect on consumption which offset
each other.
9.An increase in the interest rate leads to an income effect
which increases consumption and saving in year 1.
10.An increase in the interest rate leads to an intertemporal
substitution effect which decreases consumption and increases
saving in year 1.
MULTIPLE CHOICE
1.Real profit is zero when:a.the interest rate is zero.c.the
labor and capital markets clear. b.the depreciation rate is high.
d.the labor and capital markets do not clear.
2.When the labor and capital markets clear:a.depreciation is
zero. c.a dollar today is worth more than a dollar in the future.
b.real profit is zero.d.all of the above.
3.Real household saving is:a. B + Kc. ( B/P) + Kb. B + ( K/P)d.(
B/P) + ( K/P)
4.Real income is:a.wL + i(B+K)c.(w/P)L + i((B/P)+(K/P))b.(w/P)L
+ i((B/P)+ K)d.(w/P)L + i(B+ K)
Figure 7.1
5.In Figure 7.1 if the household opts to consume all its income
it will be at point:a.Fc.Hb.Gd.I
6.In Figure 7.1 if the household decides to save all of its
income, it would be at point:a.Fc.Hb.Gd.I
7.In Figure 7.1 if the household moves from point G to point H
on its budget, it would be:a.saving and consuming more.c.saving
more and consuming less. b.saving less and consuming more.d.saving
and consuming less.
8.In Figure 7.1 if the household moves from point I to point H
on its budget, it would be:a.saving and consuming more.c.saving
more and consuming less. b.saving less and consuming more.d.saving
and consuming less.
9.In Figure 7.1 if the household moves from point F to point H
on its budget, it would be:a.saving and consuming more.c.saving
more and consuming less. b.saving less and consuming more.d.saving
and consuming less.
10.In Figure 7.1 if the household moves from point H to point G
on its budget, it would be:a.saving and consuming more.c.saving
more and consuming less. b.saving less and consuming more.d.saving
and consuming less.
11.In Figure 7.1 if the household moves from point H to point G
on its budget, it would be:a.gaining one unit of saving and one
unit of consumption.c.gaining one unit of saving for giving up five
units of consumption. b.giving up one unit of saving for one unit
of consumption.d.giving up one unit of saving and five units of
consumption.
12.Real saving in year one is:a.real bonds plus capital in year
1 minus real bonds and capital in year 0.c.bonds plus capital in
period 1. b.bonds plus capital plus money period 1.d.interest times
the sum of bonds plus capital in period 1.
13.The households year one budget constraint is:a.real assets at
the end of year zero plus real income in year one less consumption
in year one equals real assets at the end of year one.c.real assets
at the end of year zero plus real income in year one plus
consumption in year one equals real assets at the end of year
one.b.real income in year one less real assets at the end of year
zero less consumption in year one equals real assets at the end of
year one.d.real income in year one plus consumption in year one
less real assets at the end of year zero equals real assets at the
end of year one.
14.In the one period budget constraint sources of funds
include:a.labor income. c.income from bonds.b.income from capital.
d.all of the above.
15.In the one period budget constraint sources of funds
include:a.labor income. c.capital gains. b.interests bearing
money.d.all of the above.
16.In the one period budget constraint sources of funds
include:a.capital gains. c.income from rising prices. b.income from
capital.d.all of the above.
17.In the one period budget constraint sources of funds
include:a.capital gains. c.income from bonds.b.inflation.d.all of
the above.
18.In the one period budget constraint the uses of funds
include:a.purchases of consumption goods.c.purchases of bonds.
b.purchases of capital goods. d.all of the above.
19.In the one period budget constraint the uses of funds
include:a.purchases of consumption goods.c.payment
profits.b.payment of wages.d.all of the above.
20.In the one period budget constraint the uses of funds
include:a.payment of transfers.c.payment of wages. b.purchases of
capital goods. d.all of the above.
21.In the one period budget constraint the uses of funds
include:a.payment of transfers.c.purchases of bonds. b.payment of
wages. d.all of the above.
22.The measure used to reduce future consumption to todays
values is called:a.an implicit deflator. c.an escalator.b.a
discount factor.d.a future value.
23.When a discount factor is multiplied times a future period
variable it creates a:a.future value.c.a real variable. b.a present
value. d.a nominal variable.
24.A dollar today is worth more than a dollar a year from now as
long as:a.the interest rate is negative. c.the depreciation rate is
negative. b.the interest rate is positive. d.the depreciation rate
is positive.
25.An income effect is the response of households to changes in
the present value of:a.relative prices. c.uses of funds. b.sources
of funds. d.assets at the end of year two.
26.If the interest rate is greater than zero, then the concept
of present value is that a dollar today:a.is worth more than a
dollar a year from now.c.will be worthless a year from now.b.is
worth less than a dollar a year from now. d.is worth the same as a
year from now.
27.If the present value of assets at the end of year two is
constant, an increase in the present value of sources of funds must
cause:a.consumption in periods one and two to rise.c.consumption to
rise in period one and fall in period two.b.consumption in periods
one and two to fall.d.consumption to fall in period one and rise in
period two.
28.The present value of sources of funds is: a.the value of
intial assets plus the present value of wage income plus the
present value of assets at the end of year two. c.the present value
of wage income plus the present value of assets at the end of year
two. b.the value of initial assets plus the present value of assets
at the end of year two. d.the value of intial assets plus the
present value of wage income.
29.An increase in the interest rate: a.makes consumption in
period two relatively more expensive compared to consumption in
period one. c.makes consumption in period two relatively cheaper
compared consumption in period one. b.does not change relative cost
of consuming in either period.d.discourages savings in each
period.
30.If a household consumes one less unit in period 1, they can
consume:a.on more unit in period two.c.one less unit in period
two.b.(1 + i) more units in period two.d.no more in period two.
31.Utility in economics is:a.a product with a derived demand
like electricity. c.satisfaction or happiness. b.usefulness.d.all
of the above.
32.Utility in economics:a.used to mean happiness.c.is what a
person gets from a good.b.used to mean satisfaction. d.all of the
above.
33.An increase in the interest rate can cause an income effect
by:a.making future consumption cheaper.c.making present consumption
cheaper. b.changing real income in year two.d.all of the above.
34.An increase in the interest rate:a.makes future consumption
cheaper.c.makes present consumption more expensive. b.increases
future income. d.all of the above.
35.An increase in the interest rate:a.makes future consumption
cheaper.c.makes present consumption cheaper.b.decreases future
income. d.all of the above.
36.An increase in the interest rate:a.makes future consumption
more expensive.c.makes present consumption more expensive.
b.decreases future income. d.all of the above.
37.An increase in the interest rate:a.makes future consumption
more expensive.c.makes present consumption cheaper. b.increases
future income. d.all of the above.
38.An intertemporal substitution effect is caused by a change
in:a.a price from one period to another.c.income. b.wealth. d.all
of the above.
39.The marginal propensity to save out of a temporary change in
income is approximately:a.1c.0b.0.5d.none of the above.
40.The marginal propensity to save out of a permanent change in
income is approximately:a.1c.0b.0.5d.none of the above.
41.The marginal propensity to consume out of a permanent change
in income is approximately:a.1c.0b.0.5d.none of the above.
42.The marginal propensity to consume out of a temporary change
in income is approximately:a.1c.0b.0.5d.none of the above.
43.If a worker receives a one time bonus we would expect them
to:a.save most of it. c.consume most of it. b.refuse it.d.consume
half and save half of it.
44.If a worker receives a bonus every Christmas, we would expect
them to:a.save most of it. c.consume most of it.b.reject it.
d.consume half of it and save half of it.
45.If a person wins $500 in a scratch-off lottery game, we would
expect them to:a.save most of it. c.consume most of it. b.refuse
it.d.consume half and save half of it.
46.If a worker gets a promotion that doubles their salary, with
the increase in salary we would expect them to:a.save most of it.
c.consume most of it.b.reject it. d.consume half of it and save
half of it.
47.If the household budget constraint is aggregated over all
household, it shows that:a.consumption plus net investment equal
net national product.c.C + K = Y - Kb.consumption plus net
investment equals real GDP less depreciation. d.all of the
above.
48.If the household budget constraint is aggregated over all
household, it shows that:a.consumption plus net investment equal
net national product.c.C - K = Y + K.b.consumption less net
investment equals real GDP less depreciation. d.all of the
above.
49.If the household budget constraint is aggregated over all
household, it shows that:a.consumption less net investment equal
net national product.c.C - K = Y + Kb.consumption plus net
investment equals real GDP less depreciation. d.all of the
above.
50.If the household budget constraint is aggregated over all
household, it shows that:a.profit is zero.c.C + K = Y - Kb.PC+ B+P
K = + wL + i(B + PK),d.all of the above.
51.In the multi-year budget constraint the present value of
consumption equals the value of initial assets plus the: a.present
value of savings. c.present value of wage incomes. b.present value
of final assets. d.the present value of time.
52.In the two-year household budget constraint, each unit of
initial assets is adjusted bya.multiplying by (1 + io).c.dividing
by (1 + io).b.multiplying by (1 + i1).d.dividing by (1 + i1).
53.In the two-year household budget constraint, each unit of
labor in year 2 is adjusted bya.multiplying by (1 + io).c.dividing
by (1 + io).b.dividing by (1 + i1).d.multiplying by (1 + i1).
54.In the two-year household budget constraint, each unit of
conumption in year 2 is adjusted bya.multiplying by (1 +
io).c.dividing by (1 + i1).b.multiplying by (1 + i1).d.dividing by
(1 + i0).
55.For a household budget over two years, suppose the dollar
wage rate in year 1 and year 2 equals $12, the price level in year
1 and year 2 equals 2, and the nominal interest rate in year 1 and
year 2 equals 3 percent. The total present value of wage income
over two years isa.24c.12b.12.18d.5.83
56.For a household budget over two years, suppose the dollar
wage rate in year 1 and year 2 equals $8, the price level in year 1
and year 2 equals 2, and the nominal interest rate in year 1 and
year 2 equals 3 percent. The present value of wage income in year
two only isa.3.88c.4.12b.4d.5.83
57.Suppose that the present value of a households wage income
rises. The effect on consumption most likely isa.zero.c.more
consumption in year 2 only.b.more consumption in both year 1 and
2.d.more consumption in year 1 only.
58.An increase in the interest rate in year 1 leads toa.an
intertemporal substition effect which lowers C1 and lowers C2.c.an
intertemporal substition effect which lowers C1 and raises C2.b.an
interpersonal effect which lowers C1 and lowers C2.d.an
interpersonal effect which lowers C1 and lowers C2.
59.An increase in the interest rate in year 1 leads toa.an
intertemporal substition effect which raises consumption and saving
in year 1.c.an intertemporal substition effect which lowers
consumption and raises saving in year 1.b.an income effect which
lowers consumption and saving in year 1.d.an income effect which
raises consumption and lowers saving in year 1.
60.For a 2-year household budget constraint, an increase in the
interest rate in year 1 leads to which combined effect on
consumption?a.An increase in consumption in year 1.c.A decrease in
consumption in year 1.b.A decrease in consumption in year 1 and an
increase in year 2.d.An ambiguous effect.
SHORT ANSWER
1.Derive the households two period real budget constraint.
2.What is an intertemporal substitution effect and what can
cause one?
3.What is an income effect and what can cause one?
4.What are the effects of an increase in the interest rate on
the choice of consumption over time?
5.Show the relationship between the household budget constraint
and net national product.
6.Does an increase in permanent income affect household
consumption differently than an increase in temporary income?
7.What is the marginal propensity to consume? When would you
predict its value to be close to zero?