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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.
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- How does the stock market affect consumption according to the permanent-income hypothesis? Is this prediction in line with the empirical evidence? .Explain why changes in consumption are unpredictable if consumers obey the permanent-income hypotheses and have rational expectations.According to the basic discounting principle, individuals value current consumption (i.e. consumption now) more than future consumption (i.e. consumption tomorrow). A) True B) False
- What is a random walk? How is Hall’s random-walk model of consumption related to the life-cycle and permanent-income hypotheses?Explain the term random walk in consumption. Under what conditions will consumption follow such a behavior? Aggregate consumption varies less than GDP and aggregate investment varies more. Can you reconcile these observations with assumption that consumption and investment decisions are taken by rational forward-looking agents? How do changes in r affect expected consumption growth? Interpret the effect of r on expected consumption in the light of precautionary saving.Discuss the lifecycle income hypothesis theory of consumption and explain its applicability in the Kenyan context.
- 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. Franco Modigliani: Life-Cycle Hypothesisii. Milton Friedman: Permanent-Income Hypothesisiii. Robert Hall: Random Walk HypothesisIn the discussion of the life-cycle hypothesis, income is assumed to be constant during the period before retirement. For most people, however, income grows over their lifetimes. How does this growth in income influence the lifetime pattern of consumption and wealth accumulation shown in Figure 17-12 under the following conditions? Consumers can borrow, so their wealth can be negative. Consumers face borrowing constraints that prevent their wealth from falling below zero. Do you consider case (a) or case (b) to be more realistic? Why?Consumption and the real interest rate: According to the life-cycle / permanent-income hypothesis, consumption depends on the present discounted value of income. An increase in the real interest rate will make future income worth less, thereby reducing the present discounted value and reducing consumption. To incorporate this channel into the model, suppose the consumption equation is given by Assume the remainder of the model is unchanged from the original setup, as in Table 11.1. (a) Derive the IS curve for this new specification. (b) How and why does it differ from the original IS curve?
- Calua is an economy in which people live for three periods. They receive an endowment in only one period as follows: 80 goods when young, or 90 goods when middle-aged or 115 goods when old. The real interest rate in Calua is 10%. Given this information, what endowment should a typical person choose? Assume the interest rate increases to 15%. Which endowment should a typical person now choose?State whether the statement is true or false The value of a average propensity to save can never be greater than 1explain 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.
