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A: These are the four differences between the Keynes and Fisher's Model of consumption:
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How do the life-cycle and permanent-income hypotheses resolve the seemingly contradictory pieces of evidence regarding consumption behavior?
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- According to the Permanent Income Hypothesis (PIH), what should a consumer do if she receives news that she will be demoted next year (and her salary will be halved)? Draw the paths of income and consumption for this consumer.Explain the criticism of life cycle theory of consumption and highlight the importance of economic modelsWhat does it mean when talking about full income and price when considering the household consumption model?
- What is a random walk? How is Hall’s random-walk model of consumption related to the life-cycle and permanent-income hypotheses?Identify any three non‐income determinants of consumptionaccording to neoclassical theory, what determines wages and the return to capital? How would a Marxist or Institutionalist take issue with such a description of income distribution?
- we use the Fisher model to discuss a change in the interest rate for a consumer who saves some of his first-period income. Suppose, instead, that the consumer is a borrower. How does that alter the analysis? Discuss the income and substitution effects on consumption in both periods.In the set of the IS curve analysis, which of the following is an endogenous variable? Investment quantity Real interest rate Nominal interest rate Money supply quantity1. What is a market-clearing model? When is it appropriate to assume that market clear? 2. Use the model of supply and demand to explain how fall in the price of frozen yogurt would affect the price of ice cream and the quantity of ice cream sold. In your explanation, identify the exogenous and endogenous variables. 3. Consider an economy that produces and consumes hot dogs and hamburgers. In the following table are data for two different years. Goods Hot dogs Hamburgers Quantity (2010) 200 200 Price (2010) $2 $3 Quantity (2020) 250 250 Price (2020) $4 $4 Using 2010 data as the base year Compute the following statistics for each year. Nominal GDP, Real GDP, GDP Deflator, Inflation rate using GDP deflator, CPI, Inflation rate using CPI. (Hint: i) to calculate CPI use base year fixed quantity Hot dogs 200 and Hamburgers 200, ii) To calculate inflation rate, use percentage change in price level between two years.)
- Describe the effects of a decrease in the interest rate on present and next period’s consumption if the individual is a net lender (i.e., has savings) after period 1 and the substitution effect is larger than the income effect. Show your answer graphicallyWhat does neoclassical theory say about income distribution and inequalityDerive the investment function (using the neoclassical model of investment). Explain how investment responds to changes in Marginal Product of Capital and interest rate.