ECON MACRO
5th Edition
ISBN: 9781337000529
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 9, Problem 2.5P
To determine
Pattern of saving and spending for an individual according to life-cycle-hypothesis and its impact on the rate of savings in the economy.
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(Life-Cycle Hypothesis) According to the life-cycle hypothesis, what is the typical pattern of saving and spending for an individual over his or her lifetime? What impact does this pattern have on the saving rate in the overall economy?
Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can’t people enjoy more of both? How does saving relate to investment and thus to economic growth? What role do banks and other fifinancial institutions play in aiding the growth process?
The life cycle model of consumption argues that people consume and save in different proportions as they age. Seniors tend to consume more than save as their lives adjust to the realities of old age. Assuming the hypothesis is true, how would the aging of the very large baby boomer generation affect consumption and income?
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- This question addresses the impact of saving on an economy by examining what happens if tax laws change to induce saving and how changes in tax laws can discourage saving. The following graph shows the market for loanable funds. Show the impact of a change in the tax law that successfully encourages saving by shifting either the demand curve (D), the supply curve (S), or both. A tax law change that successfully encourages saving will (increase/decrease) interest rates, which leads to (less/more) investment and economic growth. To better understand how changes in tax laws can affect saving, suppose that Madison, a rising third-year in college, plans to save $550 from her summer job in order to buy textbooks for the upcoming fall semester. Madison's parents are so impressed with her plans that they offer to pay her an additional 30% interest per month on the money she saves, which means that Madison is now earning a large rate of return on her saving. By the end of the…arrow_forwardHow does a decrease in the tax rate on income earned on saving affect saving, investment, the interest rate, and economic growth?arrow_forwardSuppose the people in a certain economy decide to stop saving and instead use all their income for consumption. They do nothing to add to their stock of human or physical capital. Discuss the prospects for growth of such an economy.arrow_forward
- what might explain the differences seen in the role of consumption and investment during the recession and recovery phases of the business cycle? what about the period before the recession?arrow_forwardWhat is short-term momentum? What are long-term reversals?arrow_forwardHow does the life cycle and the permanent income hypothesis resolve the seemingly contradictory pieces of evidence regarding consumption behaviour?arrow_forward
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