How does the stock market affect consumption according to the permanent-income hypothesis? Is this prediction in line with the empirical evidence? .
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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? .
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- what is unrealistic about friedman consumption theory ?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.The importance of income in determining savings has persisted since the time of Keynes. Why have other theories failed to displace income as the most critical variable in saving theory?
- Using the Tobin’s q theory, elaborate on the relationship between investment and capital stock?Explain how the income from production is distributed to labor and capital according to the neoclassical theory of distribution.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 how changes in interest rates and rates of return on various investment options will affect the amount of money that businesses are willing to invest to increase output.Find out the optimal consumption path, taking the interest rate as given and then to find out the equilibrium interest rate that will eliminate demand for saving and investment, taking the consumption path as given (Chapter 11 of GLS). Both times, the utility function will be the same: U = ln(ct) + 0.9ln(ct+1) So, the future counts 90% as much as the present. In Part 1, income each period is 100, and the interest rate is 20%. In Part 2, consumption in each period is 100–in other words, income each period is 100, but income isn’t storable (it’s “manna”), so you have to consume it or lose it. Answer the following question. What is the equilibrium interest rate between these two periods? If the equilbrium interest rate were lower than that level, would that create a surplus or a shortage?What other factors besides interest rates will cause the investment demand curve to shift?
- With the use of the neoclassical model of investment, explain what would happen to the rental price of capital, the cost of capital, and investment if a hurricane destroys some portion of the capital stock.In 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?How do the life-cycle and permanent-income hypotheses resolve the seemingly contradictory pieces of evidence regarding consumption behavior?