Question

89. According to the acceleration principle: (a) a relatively small increase in consumer spending results in a relatively larger increase in inflation; (b) a relatively small increase in consumer spending perceived to be permanent results in a relatively larger increase in investment; (c) a relatively small decrease in the federal budget deficit results in an even LARGER increase in capital spending (due to momentum); (d) the faster interest rates decline, the faster investment spending declines.

90. In the early stages of an economic boom, a borrower’s risk is likely to be: (a) related to deflation; (b) due to sub-par food in the cafeteria; (c) due mainly to the solvency of the lender; (d) relatively low.

91. According to the permanent income hypothesis, current consumption is a function of: (a) current income; (b) expected income over a three-year time horizon; (c) wealth, including human capital; (d) all of the above.

92. A school of thought that advocates government management of aggregate demand would be most similar to: (a) supply side economics; (b) classical economics; (c) Keynesian economics; (d) rational expectations theory.

Answer 1

89. According to the acceleration principle:

Option (b): a relatively small increase in consumer spending perceived to be permanent results in a relatively larger increase in investment.

The acceleration principle is an economic concept that draws a connection between changing consumption patterns and capital investment. It states that if the appetite for consumer goods increases, demand for equipment and other investments necessary to make these goods will grow even more. In other words, if a population's income increases and its residents, as a result, begin to consume more, there will be a corresponding but magnified change in investment.

90. In the early stages of an economic boom, a borrower’s risk is likely to be :

Option (d) "relatively low"

In economic boom, businesses ussually performs well due to strong consumer spending.

91. Option (d) : all of the above

Current consumption is a function of current income, expected income over a three year time horizon, and wealth including human capital.
Permanent income hypothesis suggests that people formulate expectations about a long term permanent level of income. It also suggests that income has permanent as well as transitory components. Permanent income consists of not just an expected long term level of income, but also wealth in general.

Since human capital can be thought of as a method of generating income , this can also be considered a part of wealth and a part of permanent income.

Depending on the permanent and current income level, people take their current consumption decisions. That is, if people find that their current level of income is relatively greater than their expected permanent income level, then they would decide to save and hence consume less. If the current income is lesser , they would not save or might engage in dissavings and thereby consume more. Current consumption increases with increase in income both (permanent and transitory).

92. Option (c) : Keynesian economics

Keynesian economics is a theory that says the government should increase demand to boost growth. Keynesians believe consumer demand is the primary driving force in an economy. As a result, the theory supports the expansionary fiscal policy. Its main tools are government spending on infrastructure, unemployment benefits, and education. A drawback is that overdoing Keynesian policies increases inflation.