1.) Rational expectations is an approach which suggests that households consumption behaviour is based not only on past experiences but also on a rational forecast of anticipated future income.

True or False

2.) The most important factor determining people's consumption behavior is the level of their income.

True or False

3.) The theory of consumption which argues that consumption is based on a household's long-run estimate of their wealth is called the

-relative income hypothesis

-absolute income hypothesis

-life-cycle model

-permanent income hypothesis

4.) The life-cycle hypothesis on consumption behavior suggests that people at the end stage of the life cycle,

-spend everything they earn so saving ends up at zero

-increase their marginal propensity to consume as income increases

-decrease their marginal propensity to consume as income increases

-consume according to class status

-have differing MPCs, which is still consistent with a constant MPC for the economy

5.) If a rise in real interest rates this period causes a fall in the following period level of consumption, the individual must be _______ in this period.

-neither a lender nor a borrower.

-a borrower.

-a lender.

-must be a saver in the current period.