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Unformatted text preview: The Life-Cycle Hypothesis BA206 Macroeconomics Robert McGill 18 Oct 2011 Life-Cycle 1 An extension to the two-period consumption model is that of the Life-Cycle Hypothesis model. The LCH model defines individual behavior as an attempt to smooth out consumption patterns over one's lifetime independent of current levels of income. This model states that early in one's life, consumption expenditure will exceed income as the individual may be making major purchases related to buying a new home, starting a family, and beginning a career. At this stage in life the individual will borrow from the future to support these expenditure needs. In mid-life however, these expenditure patterns begin to level off and are supported and exceeded by increases in income. At this stage the individual repays any past borrowings and begins to save for her or his retirement. Upon retirement, consumption expenditure may begin to decline however income usually declines dramatically. In this final stage of life, the individual dissaves however income usually declines dramatically....
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- Spring '11