Question : 41) Assume that households have positive wealth. Which of the : 1381227

41) Assume that households have positive wealth. Which of the following explains how the income effect of an interest rate increase affects consumption?

A) As the interest rate increases, the opportunity cost of current consumption falls, and therefore current consumption increases.

B) As the interest rate increases, permanent income increases and future consumption increases.

C) As the interest rate increases, expected future income increases and future consumption increases.

D) As the interest rate increases, nonlabor income increases and current consumption increases.

42) At the beginning of 2013, Joey planned to buy a new iPhone, LCD TV, and motorcycle by borrowing money. Joey already owes $25,000 on other loans. He also planned to buy new clothing and DVDs out of current income. An increase in interest rates, during 2013, will most likely

A) cause Joey to decide to borrow less money, but not change what he planned to spend on goods purchased with current income.

B) cause Joey to decide to borrow more money and to spend more on goods purchased with current income.

C) cause Joey to decide to borrow more money, but not change what he planned to spend on goods purchased with current income.

D) cause Joey to decide to borrow less money and to spend less on goods purchased with current income.

43) Assume that Brenda has positive wealth. As the interest rate decreased, Brenda reduced her current consumption. For Brenda,

A) the substitution effect of an interest rate decrease outweighs the income effect

B) the income effect of an interest rate decrease outweighs the substitution effect.

C) the substitution effect of an interest rate increase must be zero.

D) the income effect of an interest rate decrease must equal the substitution effect.

44) If an individual is a debtor,

A) the substitution effect of an interest rate increase is zero.

B) the income effect of an interest rate increase is zero.

C) the income and substitution effects of an increase in the interest rate work in the same direction.

D) the income and substitution effects of an increase in the interest rate work in opposite directions.

45) Assume that the substitution effect dominates the income effect. When the government raises tax rates, after-tax real wage rates

A) fall, consumption decreases, and labor supply increases.

B) fall, consumption decreases, and labor supply decreases.

C) rise, consumption increases, and labor supply increases.

D) fall, consumption increases, and labor supply decreases.

46) Assume that the substitution effect dominates the income effect. An increase in both consumption and labor supply would result from

A) a decrease in tax rates.

B) a decrease in transfer payments.

C) an increase in tax rates.

D) an increase in transfer payments.

47) A decrease in transfer payments will result in

A) a decrease in both consumption and labor supply.

B) a decrease in consumption and an increase in labor supply.

C) an increase in consumption and a decrease in labor supply.

D) an increase in both consumption and labor supply.

48) An increase in consumption and a decrease in labor supply would result from

A) an increase in tax rates.

B) a decrease in transfer payments.

C) an increase in transfer payments.

D) a decrease in government spending.

49) Which of the following causes an increase in labor supply?

A) when wages and the price level increase proportionately

B) a decrease in income tax rates

C) a decrease in the general price level

D) a decrease in transfer payments

50) Which of the following factors is NOT one of the determinants of a household’s budget constraint?

A) consumer’s preferences

B) income

C) wealth

D) prices