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.

a)False

b)Ture

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

a)False

b)Ture

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

a)relative income hypothesis

b)permanent income hypothesis

c)absolute income hypothesis

d)life-cycle model

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

a)decrease their marginal propensity to consume as income increases

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

c)consume according to class status

d)spend everything they earn so saving ends up at zero

e)increase their marginal propensity to consume as income increases

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.

a)a borrower.

b)a lender.

c)must be a saver in the current period.

d)neither a lender nor a borrower.