ACE 474 Study Guide Complete Questions And Correct Answers 2026/27|| ACE THE TEST

a good with an elasticity falling between -1 and 0 is considered to be - CORRECT ANSWER Inelastic a good with an elasticity of -1 is considered to be - CORRECT ANSWER unitary elastic a good with an elasticity greater than -1 is considered to be - CORRECT ANSWER elastic In an inferior good, as income rises, demand for that good goes ___ - CORRECT ANSWER Down In an Normal good, as incomes rises, demand for that good goes__ - CORRECT ANSWER Up In a necessity good, as income rises, the share of income spent on that good ___ - CORRECT ANSWER goes down In a luxury good, as incomes rises, the share of income spent on that good ___ - CORRECT ANSWER goes up What Determines a goods price elasticity of demand? (3 things) - CORRECT ANSWER 1. availability of substitutes 2. Budget Share 3. Time: Short run vs Long run What does inter temporal choice tell us? - CORRECT ANSWER tells us how rationale consumers distribute their consumption over time. Explains how interest rates affect consumption choices. What are assumptions of Inter temporal Choice? - CORRECT ANSWER 1. two time periods, future and current 2. consume all income in each period 3. save all current income and consume it in the future along with future income 4. borrow future income now and consume PV of it with current income 5. a combo of consumption and saving/borrowing What is the slope of an inter temporal indifference curve? - CORRECT ANSWER Marginal Rate of Time Preference (MRTP) (Change in c2/ Change in C1) When MRTP 1 what can you derive from this? - CORRECT ANSWER it is a positive time preference, requires a lot of future consumption to give up a little now. (Patient) When MRTP 1 what can you derive from this? - CORRECT ANSWER it is a negative time preference, in this case you are willing to give up a lot of current consumption now to get more future. (Impatient) When MRTP = 1 what can you derive from this? - CORRECT ANSWER it is a neutral time preference, indifferent between future and current consumption. (neutral) When is saving ideal? A. when interest rates are high B. When interest rates are low - CORRECT ANSWER B What affects an individuals time preference? - CORRECT ANSWER 1. uncertainty about the future 2. circumstances now 3. preference for improving standard of living 4. Self Control Pitfall What does interpemorpal choice assume? - CORRECT ANSWER consumption is based on the income the consumer expects on entire lifetime. What are keynes model assumptions? - CORRECT ANSWER Assumptions 1. consumption is only a function of current income 2. as income rises, consumption rises by no more than income increases 3. Rich expected to save higher percentage than poor 4. income primary determinant of consumption and that interest rates aren't important What are keynes model limitations? - CORRECT ANSWER Limitations 1. interest rates matter 2. ratio of consumption to income fairly constant over decades. 3. income increases and savings only increased a little, isn't consistent with keynes model What are Modigliani's assumptions & limitations? - CORRECT ANSWER assumptions 1. systematic variations in come over persons life span 2. saving & borrowing allow for smooth consumption 3. lifetime consumption = lifetime income Limitations 1. consumers have other motives for savings other than retirement 2. precautionary savings 3. bequests What are Friedmans model assumptions and limitations - CORRECT ANSWER assumptions 1. people base consumption on average yearly income and transitory yearly income MRS = ? (think indifference curves and budget constraints) - CORRECT ANSWER MRS = slope of bud