Explain the concepts of excess sensitivity and excess smoothness that arises from the empirical literature on the permanent income hypothesis? What could explain these findings?
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(A). Explain the concepts of excess sensitivity and excess smoothness that arises from the empirical literature on the permanent income hypothesis? What could explain these findings?
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- 1. Answer both parts (a) and (b). (a) Explain the Ricardian Equivalence Theorem using a two period model of consumption. Explain in detail. (b) Is the Ricardian Equivalence Theorem likely to hold in practice? Explain in detail. 2. Answer both parts (a) and (b). (a) What does r>g mean? Explain in detail. (b) How does it help explain the recent evolution of income inequality? Explain in detail.Q1. Refer to the theories of consumption, give brief answers to the following questions.1. What is meant by secular stagnation? What led to the failure of this concept?2. Identify any two similarities and differences between permanent and life cycle income hypothesis?3. If one is to compare “???” out of permanent income and “???” out of transitory income, which would be greater in terms of value and why?Suppose that National Assembly passes a new budget that increases spending on public education by $300 billion (or, approximately $1,000 per person). Assume that this spending is completely wasteful in the sense that it produces no discernable improvement in the public education system (a pretty fair assumption given the empirical evidence). a) Explain the impact of this policy on employment and interest rates assuming that the spending is finances by an immediate lump sum tax of $1000 per person. Does it matter if the spending is perceived as permanent? b) How would your answer to (a) change if the spending was financed by a proportional increase in all marginal income tax rates. c) How would your answer to (a) change if the spending was financed by an increase in the capital gains tax (think of the capital gains tax as a tax on savings)?
- Discuss the lifecycle income hypothesis theory of consumption and explain its applicability in the Kenyan context.Q1. Refer to the theories of consumption, give brief answers to the following questions. 1. What is meant by secular stagnation? What led to the failure of this concept? 2. Identify any two similarities and differences between permanent and life cycle income hypothesis? 3. If one is to compare “mpc" out of permanent income and “mpc" out of transitory income, which would be greater in terms of value and why? 4. Suppose you earn same income as one of your cousins but expect to live longer than your cousin, how would your consumption function be different than that of your cousin? Would you consumer more or less than him? 5. Refer to the following intertemporal budget constraint of a respective consumer: Second-period consumption, C, B (1 +r)Y, + Y, Consumer's budget constraint Saving Borrowing Y, Y, +Y/(1 + r) First-period consumption, C, a. How would this budget constraint change if individual becomes more presented oriented (he discounts future heavily)? b. How would this budget…Consider an economy as described in class and is further characterized by C=eY, with c=0.75, T- = 250, NX=250, and I = 1 - br, with I = 500 and b=5,000. Note that investment depends on the interest rate (r). a. Calculate the income equilibrium of the economy b. Assume that, due to the increasingly pessimistic expectations of investors, autonomous investment decreases from 500 to 300. The interest rate and all other exogenous variables stay constant. Calculate the resulting change in equilibrium income. c. At the same time the interest rate decreases from 0.06 to 0.05. Calculate the effect on equilibrium income.
- How does the stock market affect consumption according to the permanent-income hypothesis? Is this prediction in line with the empirical evidence? .This question has two parts and concerns the permanent income hypothesis. Which statement best defines the permanent income hypothesis? Consumer spending depends on the level of disposable income that people expect to have over the course of their lifetime. When in a recession, although current consumer spending can be observed, future consumer spending cannot be predicted due to an unknown number of people leaving their temporary recession jobs for higher‑paying, permanent jobs that better fit their skills. Consumer spending depends on both the income and wealth of people in the economy. Consumer spending is proportional to the ratio of people in stable full‑time employment (that is, with "permanent" income) and people in unstable part‑time employment (that is, with "temporary" income). According to the permanent income hypothesis, which situations would result in an immediate increase in consumer spending, which would result in an immediate decrease in consumer spending,…Explain why changes in consumption are unpredictable if consumers obey the permanent-income hypotheses and have rational expectations.
- Relate the permanent income hypothesis to the Ricardian equivalence theorem.b. From the Intertemporal Choice Model, many theories (non-Keynesian theories ofConsumption) came into being. Using graphical and mathematical expressions, compareand contrast the following theories on consumption behaviours:i. Franco Modigliani: Life-Cycle Hypothesisii. Milton Friedman: Permanent-Income Hypothesisiii. Robert Hall: Random Walk Hypothesisb. From the Intertemporal Choice Model, many theories (non-Keynesian theories of Consumption) came into being. Using graphical and mathematical expressions, compare and contrast the following theories on consumption behaviours: i. Milton Friedman: Permanent-Income Hypothesis Robert Hall: Random Walk Hypothesis Franco Modigliani: Life-Cycle Hypothesis ii. iii.
