Econ102 exam II notes p1

Econ102 exam II notes p1 - Econ102 exam II notes p1 Life...

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Econ102 exam II notes: p1 Life cycle theory of consumption · Income starts low, increases as you get older, and then falls · When you're young, you spend more than you earn o Because you and borrow · As you get older, you earn more than you consume. You pay back what you borrowed and save for retirement. o Once you retire, your income is less than consumption again and you begin to spend your savings. · Rather than current income, it's your average level of expected future income, or your permanent income, that matters. · Gov sends you a tax rebate of 1000 dollars. The gov hopes you will spend it to stimulate the economy. But, according to the life cycle hypothesis, and this idea of permanent income, that rebate won't affect current spending very much, since you'll spend the additional income over your whole life. If that's true, temporary tax cuts or tax increases will be much less effective than a permanent tax change.
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