Intermediate Macroeconomics Sample Problems
Answer: d. With the Keynesian consumption function the marginal propensity to consume is constant and the average propensity to consume declines as income increases. If answer c had been written, the APC decreases..., then it would also have been a correct answer.
Answer: B. Knowing the average level of income allows a person to estimate total lifetime income. An expectation of lifetime income allows a person to plan a stable level of consumption.
Answer: A. This question requires understanding how the marginal propensity to consume is calculated given an expected permanent change in income (A) or a temporary change in income (B and C). The MPC out of a temporary change in income is 1 divided by number of years expected to live. The MPC out of a permanent change in income is the number of years working divided by the number of years expected to live. The MPC out of a permanent change in income is much larger than the MPC out of a temporary change in income. Thus, even though the current period change in income is larger in answer (B), the affect on current period consumption is much larger for answer (A).
|Worker's current age||35|
|Life expectancy (age at death)||75|
|Expects to work until age||65|
|Accumulated wealth today||$200,000|
|Expected annual average income while working||$36,000|
The worker described in the table above wants a stable level of consumption throughout life and leave no estate. How much per year would you expect this person to consume?
Additional questions could be asked such as , if this worker unexpectedly won a $100,000 lottery, what would annual consumption now be? ($32,000 + $100,000/40 years = $34,500). What is the marginal propensity to consume out of a temporary change in income? (1/expected lifetime = 1/40 = 0.025), and so on.
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