Flashcards
Life-Cycle Hypothesis
Cards in this deck (6)
- 1What does the LCH says?It says that income varies systemtically over the phases of the consumer's "life-cycle" and that saving will allow consumer to achieve smooth consumption
- 2Assumptions of the LCH1. Zero real interest rate
2. Consumption smoothing is optimal - 3what are the notations used in LCH?W= Initial wealth
Y= annual income until retirement (assumed constant)
R= Number of years until retirement
T= Lifetime in years - 4Lifetime resources given by?W + RY
- 5What will consumer do to achieve smooth consumption?Divide lifetime resources equally over time
- 6Equation form for the previous card?W/T + RY/T