Explain how changes in wealth, the price level, interest rates, and expectations alter the consumption curve
An increase in wealth increases consumption at each level of disposable income (shifts the consumption curve upward). A rise in the price level reduces the real value of assets. This reduction in wealth reduces consumption at each level of income (shifts the consumption curve downward). An increase in interest rates the reward for saving and discourages borrowers from securing current spending power. An increase in interest rates, therefore, will shift the consumption curve downward. A rise in price expectations may encourage more households to buy now to beat the expected price increase regardless of their current disposable income (shifts the consumption curve upward).
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The Tobit model relies crucially on normality and heteroskedasticity in the underlying latent variable model.
Answer the following statement true (T) or false (F)
Automatic stablizers
A. is more effective in influencing real GDP than discretionary fiscal policy at times of a recession. B. are more effective in influencing real GDP at normal times than at times of a recession. C. is probably not very effective in influencing real GDP during a recession. D. works well because there are no policy lag problems in influencing real GDP.
Since 1970, the U.S. economy has experienced four recessions.
Answer the following statement true (T) or false (F)
As currently calculated, the CPI tends to overstate the true inflation rate because
A) we cannot know what the true inflation rate is. B) it fails to correctly measure quality changes for some products. C) the market basket selected is inappropriate. D) the market basket fails to weigh housing costs sufficiently.