1.The LC-PIH theory of consumption implies that:

A) The mpc out of wealth should be very small

B) There are different mpcs, that is, out of permanent income, out of transitory income, and out of wealth

C) Even though the mpc out of wealth is very small, a large change in stock values can still affect the economy

D) An individual's mpc out of permanent income changes with age

E) all of the above

2.The life-cycle theory of consumption can be summarised as follows:

A) Retired people need less so they can save more than working people

B) People want instant gratification and seldom worry about the future

C) People always tend to consume almost all their current income

D) People plan their consuming and saving patterns to optimise the lifetime benefit from their income

E) People adjust their current consumption constantly to keep a stable saving pattern over their lifetime

3.Which of the following theories of consumption behaviour was introduced by Milton Friedman?

A) The absolute-income hypothesis

B) The relative-income hypothesis

C) The permanent-income hypothesis

D) The life-cycle hypothesis

E) The random walk hypothesis

4.If you are age 20, have no accumulated wealth, and have an expected average annual income of $24,000, how much should you consume each year if you want to retire at age 65 and expect to live until age 80? You desire to leave no estate and to consume an equal amount in every year.

A) $24,000

B) $22,000

C) $20,000

D) $18,000

E) $16,000

5.According to the permanent-income theory, which of the following would have the greatest impact on the current consumption of a 40-year-old, tenured university lecturer?

A) An inheritance of $8,800 from a distant uncle

B) Winning $9,200 in Lotto

C) $11,400 In royalties from a textbook that took three years to write

D) A loss of a stamp collection worth $14,500

E) A promotion to full professor combined with a $7,000 per annum raise

CONCEPTUAL

1.Explain why successful gamblers (and thieves) might be expected to live very well even in years when they don't do well at all.

2.What are the similarities between the life-cycle and the permanent income hypothesis? Do they differ in their approaches to explaining why the long run MPC is greater than the short run MPC?

3.what is a random walk? How is Hall's random walk model of consumption related to the life cycle and the permanent income hypothesis?