Econ 110B Ch16 Solutions

Econ 110B Ch16 - Economics 110B Solutions to Practice Questions for Chapter 16 1 1 ,housingwealth andhumanwealth. interestrates,income,andtax

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Economics 110B Solutions to Practice Questions for Chapter 16 1) An individual would have to calculate her lifetime values of financial wealth, housing wealth,  and human wealth. This implies that the individual would have to form expectations of future  interest rates, income, and taxes for the remainder of her working life. Once done, the  individual would then calculate the amount of consumption per year she preferred given this  total wealth. If in the current period, current disposable income is less than this level of  current consumption, she would borrow the difference.   2) Human wealth is the present value of expected after-tax labor income over the individual’s  lifetime.  Housing wealth is the value of the real estate owned minus mortgages owed on that  real estate.  Financial wealth includes the value of the stocks, bonds, checking accounts, and  saving accounts held by the individual.  Non-human wealth is the sum of housing wealth and  financial wealth.  Total wealth is the sum of human wealth and non-human wealth.   3) A change in current income is not likely to be viewed with certainty as permanent.  Since part  of any change in temporary income will be saved, consumption will increase by an amount  less than the change in income. If the change were viewed to be permanent, the change in  current consumption would be greater.   4) Current consumption also depends on wealth.  If any of the determinants of wealth change, 
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This note was uploaded on 05/01/2011 for the course ECON 110B taught by Professor Peters during the Spring '07 term at UCSD.

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Econ 110B Ch16 - Economics 110B Solutions to Practice Questions for Chapter 16 1 1 ,housingwealth andhumanwealth. interestrates,income,andtax

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