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What is a random walk? How is Hall’s random-walk model of consumption related to the life-cycle and permanent-income hypotheses?
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- Explain the term random walk in consumption. Under what conditions will consumption follow such a behaviour?.“According to the Random-Walk Hypothesis of Consumption under Uncertainty, individuals don’t need to optimise their consumption over time since the consumption is totally unpredictable” True or False?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.
- What is the Euler equation for consumption and what is What is the Euler equation for consumption, and what is its economic interpretation? What is the Euler equation for consumption and what isHow do the life-cycle and permanent-income hypotheses resolve the seemingly contradictory pieces of evidence regarding consumption behavior?2.1 According to the permanent income hypothesis, how will a representative consumer's bor- rowing and consumption respond to: 1. An anticipated temporary decrease in income at t = 2. 2. An anticipated permanent decrease in income (at time periods t = 1 and t = 2) when it occurs. 3. Are the answers different if the changes in income are unanticipated, i.e. if they come as a surprise to the consumer? Comment on the size of the marginal propensity to consume.
- What is consumption function? Differentiate between Keynesian consumption theory and Permanent income theory of consumption.Derive the investment function (using the neoclassical model of investment). Explain how investment responds to changes in Marginal Product of Capital and interest rate.Explain the criticism of life cycle theory of consumption and highlight the importance of economic models
- 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?Construct a consumption function from the data given here and determine the MPC. Given the consumption function in the above question, what is the relationship between disposable income and consumption? Is it direct or indirect and then explain what it means.For a given household, the value of change in consumption is $2500 and the change in income is $6200 What would be the value of Marginal propensity to Consume
