Question: In the consumption-leisure framework, if the marginal rate of substitution between consumption and leisure is greater than the after-tax real wage, then the consumer should optimally increase leisure and decrease consumption.
Answer Options:
Answer: True. The marginal benefit of additional leisure exceeds its opportunity cost. The household should therefore increase leisure, reduce labor supply, and consequently reduce consumption until the marginal rate of substitution equals the after-tax real wage. Question 2
Question: When aggregating from micro-labor supply to macro-labor supply, substitution effects are ignored.
Answer Options:
Answer: False. Substitution effects are important in explaining how labor supplied responds to changes in the real wage and are not generally ignored when constructing aggregate labor supply. Question 3
Question: According to Ricardian Equivalence, a tax cut today followed by a tax increase of equal present value in the future will have no effect on national savings regardless of whether taxes are lump-sum or proportional.
Answer Options:
Answer: False. Ricardian Equivalence requires lump-sum taxes. Proportional taxes affect marginal incentives involving work, consumption, and saving, so the timing and form of taxation may affect economic behavior. Question 4
Question: In the consumption-savings framework, an increase in the real interest rate always leads to higher savings, regardless of a consumer’s initial position as a borrower or lender.
Answer Options:
Answer: False. A higher real interest rate creates both substitution and income effects. The substitution effect encourages current saving, but the income effect differs for borrowers and lenders. Therefore, saving does not necessarily increase for every household. Question 5
Question: A positive Total Factor Productivity shock shifts the labor demand curve rightward, but does not affect the labor supply curve in the standard consumption-leisure framework.
Answer Options:
Answer: True. Higher current productivity raises the marginal product of labor and shifts labor demand to the right. In the standard model, labor supply depends on the real wage and preferences, so productivity does not directly shift the labor-supply curve. Question 6
Question: If the money growth rate permanently increases in the long run, then in steady state, the inflation rate will increase by exactly the same amount, with no long-run effect on real variables.
Answer Options:
Answer: True, under the steady-state assumptions used in the model