Explain the permanent-income hypothesis and the life-cycle hypothesis. How are these hypotheses similar?
What will be an ideal response?
The permanent-income hypothesis was developed by Milton Friedman to explain consumption smoothing. According to this hypothesis, household consumption depends on permanent income, and households use financial markets to save and borrow to smooth consumption in response to fluctuations in transitory income. Friedman argued that the level of consumption depends only on the level of permanent income.
The life-cycle hypothesis was developed in part by Franco Modigliani to explain consumption smoothing. According to the life-cycle hypothesis, households use financial markets to borrow and save to transfer funds from periods when income is high, such as their working years, to periods when income is low, such as their retirement years, periods of unemployment, or years spent in college as a student.
Both hypotheses are used to explain consumption smoothing, and assume that households prefer to smooth consumption over time.
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When the price of a good rises from $5 to $7 a unit, the quantity supplied increases from 110 to 130 units a day. The price elasticity of supply is _______. The supply of the good is _______
A. 60; elastic B. 10; elastic C. 0.5; inelastic D. 2; inelastic
If sellers have more information about the quality of goods than do buyers, then:
A. sellers of better-than-average goods will have difficulty getting their asking price. B. buyers will never make purchases. C. buyers always will be exploited. D. sellers of lower-than-average goods will have difficulty getting their asking price.
Economic stagnation coupled with high inflation is commonly called:
A. stagflation. B. inflationary stagnation. C. stagnatory growth. D. inflagnation.
What is the purpose of a pollution tax?
What will be an ideal response?