University of California, Los Angeles - ECON 102solutions_ch27

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Solutions - Chapter 27 Econ 2 May 3, 2013 Facts and Tools 1. If people want to smooth their consumption over time, what will they tend to do when they win the lottery: Spend most of it within a ... year or save most of it for later? Solution: If people want to smooth their consumption, they will save most of their winnings so that they can increase their spending over time. The evidence is generally supportive of the theory if we recognize that some spending—such as spending on houses and cars—is equivalent to spending over time since these goods are durable. 2. A large number of economic and psychological studies demonstrate that people who are impatient in one area of their life tend to be impatient in other areas as well. This isn’t true in every single case, but of course that doesn’t matter if we’re trying to understand the “typical person.” Based on your general knowledge and educated guessing: a. Who is more likely to smoke: A criminal or a law-abiding citizen? b. Who is more likely to shoot heroin: A person who saves 20 percent of their income or a person who can’t ever find a way to save? c. Who is more likely to have a lot of credit card debt: A smoker or a nonsmoker? Solution: a. A criminal is more likely to smoke. b. A person who can’t ever find a way to save is more likely to shoot heroin. c. A smoker is more likely to have a lot of credit card debt. 3. The typical savings supply curve has a positive slope. If a nation’s saving supply curve had a perfectly vertical slope, what would that mean? a. People in this country save the same amount no matter what the interest rate is. b. People in this country are extremely sensitive to interest rates when deciding how much to save. 1 Solution: The answer is a. A perfectly vertical curve would mean that people save the same amount no matter what the interest rate. 6. In each of the following, answer either “bank account,” “bonds,” or “stocks. [Show More]

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