ECON 2450 Study Guide - Ricardian Equivalence, Intertemporal Consumption, Intertemporal Choice

Suppose that the interest rate increases. There are more lenders than borrowers in the economy, and the income effect is assumed to dominate the substitution effect. What is the aggregate effect of an increase in the interest rate on the optimal c, c0, and s?

c: current consumption

c0: future consumption

s: savings

Suppose that a consumer's future income increases, and the real interest rate increases as well. In a diagram, determine how the consumer's optimal choice of current consumption and future consumption changes and how saving changes. Show how your results depend on income and substitution effects and consider the cases where the consumer is initially a lender and where he or she is initially a borrower.

When government spending increases, the first shift in the labor supply curve is due to a/an ____________ effect, and the second shift is due to a/an _____________ effect.

A. income; substitution

B. substitution; income

C. substitution; income

D. income;income

Consider the effects on current consumption due to an expected future increase in total factor productivity. The substitution effect follows from the change in _____________ and the income effect follows from the change in _____________.

A. the umemployment rate; the real wage rate

B. the real wage rate; the tax rate

C. the marginal product of labor; the marginal product of capital

D. the real interest rate; the consumer's lifetime weath.

Why does a future increase in total factor productivity affect current investment demand?

A. Because current captial decreases

B. Because the current marginal product of capital increases.

C. Because the future marginal product of capital increases

D. None of the above