MACROECONOMICS+ACHIEVE 1-TERM AC (LL)
10th Edition
ISBN: 9781319467203
Author: Mankiw
Publisher: MAC HIGHER
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Chapter 19, Problem 4QR
To determine
The unpredictability of changes in consumption.
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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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Chapter 19 Solutions
MACROECONOMICS+ACHIEVE 1-TERM AC (LL)
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- what is unrealistic about friedman consumption theory ?arrow_forwardWould it be plausible to claim that the theory of rational expectations is a distorted form of neoclassical economics? Explain.arrow_forward2.1 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.arrow_forward
- 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.arrow_forwardWhat other factors besides interest rates will cause the investment demand curve to shift?arrow_forwardSummarize the main implications of the neoclassical consumption model forconsumption and saving.arrow_forward
- Compare and contrastadaptive expectations and rationalexpectations.arrow_forwardIn 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?arrow_forwardb. 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. Milton Friedman: Permanent-Income Hypothesis Robert Hall: Random Walk Hypothesis Franco Modigliani: Life-Cycle Hypothesis ii. iii.arrow_forward
- Derive the investment function (using the neoclassical model of investment). Explain how investment responds to changes in Marginal Product of Capital and interest rate.arrow_forwardThis 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,…arrow_forwardHow will planned investment spending change as the following events occur? a) The interest rate falls as a result of Federal Reserve policy. b) The U.S. Environmental Protection Agency decrees that corporation must upgrade or replace their machinery in order to reduce their emissions of sulfur dioxide. c) Baby boomers begin to retire in large number and reduce their savings, resulting in higher interest rates. Thank you very much for your help.arrow_forward
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