(a) With respect to the lifecycle theory of consumption suppose that a consumer expects to live for 40 more years and work for 20 of those years. Denote initial wealth by W and the constant income earned each year during the working years by Y. 

i) Write the equation of the lifetime consumption function 

(ii) Determine the marginal propensity to consume out of income 

(iii) Determine the marginal propensity to consume out of wealth 

(iv) What is the impact of an increase in wealth on the lifetime consumption function? Explain. 

(b) What are the main differences between the life cycle theory of consumption and its Keynesian counterpart? 

(c) Is there a basic difference between the life cycle hypothesis and the permanent income hypothesis? If so, what is it? (d) The effect of wealth on consumption is commonly known in macroeconomics as the Pigou effect. In which of the four theories of consumption you have studied in this course is the Pigou effect stressed?

Answer rating: 100% (QA)

a i The equation of the lifetime consumption function can be written as C Y WY 1 TN where C represents consumption Y represents income W represents in... View the full answer