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Explain why changes in consumption are unpredictable if consumers obey the permanent-income hypotheses and have rational expectations.
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- What is meant by “excess sensitivity” of consumption? Is this view of consumption consistent with the permanent-income hypothesis? Explain. How does the stock market affect consumption according to the permanent-income hypothesis? Is this prediction in line with the empirical evidence? Explain.In consumption theory, what is meant by the expression “consumption smoothing”? Why is consumption smoothing a key element of the life-cycle hypothesis and permanent income hypothesis? (100 words max)With the theoritical of Permanent-Income Hypothesis in mind, explain how Friedman sought to reconcile the evidence about consumption from cross-sectional data with that from time series macroeconomic data?.
- why do expectations play such an important role in investment demandFrom 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. Franco Modigliani: Life-Cycle Hypothesisii. Milton Friedman: Permanent-Income Hypothesisiii. Robert Hall: Random Walk HypothesisHow does the stock market affect consumption according to the permanent-income hypothesis? Is this prediction in line with the empirical evidence? .
- explain whether each of the following statements is true or false. Q) If real interest rates become negative, the neoclassical model of investment predicts there is now no limit to how much capital firms want to purchase.What is a random walk? How is Hall’s random-walk model of consumption related to the life-cycle and permanent-income hypotheses?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 consumer obey the permanent income hypothesis and have rational expectations? explain in detail. Book Mankiw chapter 14Which of the following would not cause shift in the investment demand curve as the above graph shows? Select one: a. Business taxes b. Expectations c. Changes in real interest rates d. Acquisition, maintenance, and operating costs e. Technological changeHow do the life-cycle and permanent-income hypotheses resolve the seemingly contradictory pieces of evidence regarding consumption behavior?