Help me answer the following questions: (provide an explanation or bases how you arrive the answer)

1.According to the life-cycle theory of consumption, an individual's

a. Consumption sharply decreases after retirement.

b. mpc out of transitory income is fairly large.

c. mpc out of transitory income is fairly small.

d. Consumption is not affected at all by changes in wealth.

2.If we divide consumption expenditures into the purchases of non-durable goods and the purchases of durable goods, we realize that:

a. the consumption of non-durable goods is much more interest sensitive than the consumption of durable goods.

b. the life-cycle and permanent-income theories apply much more to the consumption of non-durable goods than durable good.

c. the consumption of durable goods this year is largely the same as the consumption of durable goods last year.

d. the consumption of non-durable goods is more strongly affected by a surprise change in income than the consumption of durable goods.

3.The simple life-cycle hypothesis suggests that people save largely to finance retirement and after retirement draw on their accumulated wealth to maintain a steady consumption stream. However, this view:

a.does not explain why the long-run mpc is larger than the short-run mp.

b. is not consistent with the fact that the elderly rarely use up their accumulated wealth.

c. ignores that most people are too impatient to achieve a certain target wealth level before retirement.

d. ignores the effect of interest rate changes on current consumption.

4.Household savings behavior tends to be fairly interest inelastic, which can be largely explained by:

a.the fact that the income effect dominates the substitution effect.

b. the fact that the consumption of durable goods tends to be very interest inelastic.

c. the fact that the substitution effect is largely offset by the income effect.

d. a very large substitution effect.

5.The marginal revenue product of capital is the :

a. change in a company's balance sheet when it acquires new plant

b. additional value of output from using more capital

c. change in a company's share price

d. changing value of the capital stock

6.Part of the sensitivity of current consumption to current income changes arises from:

a. people's inability to borrow when their current income decreases.

b. the fact that people may not believe an announcement that the government will lower taxes.

c. the fact that people are not as forward looking as the permanent income theory suggests.

d. all of the above.

7.A person who wins $10,000 from in a lottery, is LEAST likely to do which of the following?

a. take a trip around the world

b. deposit $5,000 in a savings account and invest $5,000 in mutual funds

c. use it for a down payment on a house

d. buy some Microsoft stocks

8.The fact that the lure of 0% financing by U.S. car manufacturers in 2001 resulted in record sales of U.S. cars is an indication that:

a. the consumption of durable goods is not as variable as the consumption of non-durable goods.

b. The consumption of durable goods is mostly determined by random events.

c. the permanent-income theory of consumption has no validity.

d. the theory of durable consumption goods is really a theory of investment applied to households.