Question

According to the economic life cycle theory, since people can borrow when they are young, on what would a person's standard of living depend?

Select one:

a. aggregate income rather than annual personal income

b. income averaged across seasons rather than across years

c. lifetime income rather than annual income

d. annual extended family income rather than annual personal income

What problem in measuring inequality does the fact that the young often borrow and then repay these loans when they are older relate to?

Select one:

a. economic mobility

b. the economic life cycle

c. transitory versus permanent income

d. in-kind transfers

Which statement best summarizes the idea of cutting income tax rates increase tax revenue?

Select one:

a. This argument is valid for all countries that have income taxes.

b. This argument is valid for most other countries but not the United States.

c. The argument is valid for any country that has very high marginal tax rates.

d. This argument is only valid for the United States but not for most other countries.

Answer 1

Q1) The answer is (c) lifetime income rather than the annual income

If the people expect the income in the future to be high, they can borrow right now to smoothen consumption and pay later with the higher income. Thus, an economic agent takes into account his/her lifetime income in making the consumption decisions and the resulting standard of living. All other options are wrong as they do not affect the agent's decisions

Q2) the answer is (b) the economic life cycle.

Since, on does not know if people are borrowing in anticipation of higher income or not, the current status of living can not be properly determined due to the economic life cycle and inequality is hard to pinpoint. All other options are wrong as they do not relate to the statement.

Q3) The answer is (c) The argument is valid for any country that has very high marginal tax rates.

Such countries are on the wrong end of the Laffer's curve and decreasing tax rates will increase tax revenue as more activity will be carried out.