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1. The desire to keep consumption relatively even over time is commonly known as Consumption smoothing motive Opportunity cost motive 2. A rise in income today causes individuals to Increase both current and future consumption, leading to a fall in private savings Increase both current and future consumption, leading to a rise in private savings 3. A rise in future income causes individuals to Increase both current and future consumption, leading to a fall in private savings Increase both current and future consumption, leading to a rise in private savings 4. According to the substitution effect, a rise in the real interest rate (r) causes Opportunity cost of consumption to rise and hence Opportunity cost of consumption to rise and hence decreases private savings increases private savings 5. According to the income effect, a rise in r causes a borrower to To feel poorer and thus decreases savings Feel poorer and thus increases their savings 6. The private savings curve is upwards sloping because The substitution effect (SE) is greater than the income The substitution effect (SE) is smaller than the income effect (IE), so a higher r increases private savings effect (IE), so a higher r increases private savings 7. The S curve will shift outwards [to the right] when Income falls Income rises 8. The profit maximizing condition for the firm when choosing how much capital to invest in optimally is MPK=(d+r) MPK= pe(d+r) MPN=w MPK=P 9. When user costs rise due to either higher r or higher pr or higher d this will cause User costs to rise, leading to MPK pe(d+r), which causes firms to invest more in capital stock until which causes firms to invest more in capital stock until their profits are maximized their profits are maximized 11. The I curve will shift outwards [to the right] when The real price of capital falls The real price of capital rises 12. Which of the following shows the market for goods and services in equilibrium? Choose all that apply I=S Y=C+I+G 1=C S=YC-G 13. Using the S-I model of chapter 4 we can show that a rise in income (TY) causes Savings to rise, leading to higher equilibrium r, higher equilibrium S, and higher equilibrium I Savings to rise, leading to lower equilibrium r, higher equilibrium S, and higher equilibrium I Savings to rise, leading to higher equilibrium r, lower equilibrium S, and lower equilibrium