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1. Assuming the real interest rate is 4%, calculate how, according to the PIH, consumption and borrowing would change in each of the following cases (a) A stock market crash permanently reduces the value of an individual's assets by 1,000. (b) Households are told that in a year's time, they will receive a one-off bonus of 1,000. Then in one year's time, it is not paid. (c) Comment briefly on your results.

2.The opportunity cost of shifting production choices The following graph shows the production possibilities curve (PPC) of an economy that produces clothing and steel. The black points (plus symbols) represent three possible output levels in a given month. You can click on the points to see their exact coordinates. ? 40 35 PPC 30 25 CLOTHING (Thousands of pieces) 20 15 10 5 0 0 90 180 630 720 270 380 450 540 STEEL (Millions of tons)

Suppose the economy initially produces 15,000 pieces of clothing and 450 million tons of steel, which is represented by point A. The opportunity cost of producing an additional 5,000 pieces of clothing (that is, moving production to point B) is____ tons of steel. (A. 54 million, B. 72 Million, C. 90 Million, D. 108 Million. E. 135 Million)

Suppose, instead, that the economy currently produces 378 million tons of steel and 20,000 pieces of clothing, which is represented by point B. Now the opportunity cost of producing an additional 5,000 pieces of clothing (that is, moving to point C) is ___ tons of steel. (A. 54 Million B. 72 Million C. 90 million E. 108 Million E.135 Million)

Comparing your answers in the two previous paragraphs, you can see that the opportunity cost of 5,000 additional pieces of clothing at point B is _____ the opportunity cost of 5,000 additional pieces of clothing at point A. (A.greater than B. Less than C. Equal to)

This reflects the _______ (A.Law of increasing opportunity costs B. fact that resources are scarce C. notion that countries can gain from trade.)

3.Explain the concepts of excess sensitivity and excess smoothness that arise from the empirical literature on the permanent income hypothesis. What could explain these findings?