5. A) B) C) D) Consumption is said to follow a random walk if: consumers have ra

Question

5. A) B) C) D) Consumption is said to follow a random walk if: consumers have rational expectations. consumption is proportional to permanent income. changes in consumption are unpredictable. changes in consumption produce secular stagnation. 7. The inside lag is the time: A) before automatic stabilizers respond to economic activity. B) after automatic stabilizers respond to economic activity. C) between a shock to the economy and the policy action responding to the shock D) between a policy action and its influence on the economy. 8. According to the traditional view of government debt (as in the IS-LM model), if taxes are cut without cutting government spending, then in the short run interest rates will and investment will A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase 11. The recession produced by a financial crisis: A) mitigates the effects of the financial crisis B) puts an end to the financial crisis. C) puts further pressure on asset prices and financial institutions. D) re-inflates the asset-price bubble.

Explanation / Answer

Answer.)

Q5.) C.) Changes in income are unpredictable

The random walk hypothesis - if Permanent Income Hypothesis is correct and consumers have rational expectations, then: consumption should follow a random walk if changes in consumptions should be unpredictable

Q7.) C.) between a shock to the economy and the policy action responding to the shock

The inside lag is defined as the length of time it takes to recognize that a disturbance has occurred and formulate and implement an appropriate policy response to it.

Q8.) B.) Increase; Decrease

Q11.) C.) Puts further pressure on asset prices and financial institutions.

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