Answer to Question #232214 in Macroeconomics for Ike

Question

1) Write short notes on the following theories of consumption.

I) Absolute income hypothesis

II) Relative income hypothesis

III) life cycle hypothesis

IV) permanent income hypothesis

V) Rational expectation and consumption

2. Write short notes on the following theories of investment

I) Net present value approach

II) Marginal productivity of capital

III) Marginal efficiency of capital

IV) Rigid accelerator theory and flexible accelerator theory

V) Tobin's Q-theory

3) Discuss five factors that influence investment.

4) Apart from income what are the other determinants of consumption?

Answer 1

1:

I)                  Absolute income hypothesis

This concerns how consumers divide their income between saving and consumption.

II)               Relative income hypothesis

It states that individual altitude to consumption is determined by level of income.

III)             life cycle hypothesis

This describes peoples spending and saving in lifetime

IV)            permanent income hypothesis

This is a theory of consumer spending stating that people income based on their expected long term average income.

V)               Rational expectation and consumption

This states that individual make decision on consumption based on information available or experiences.

2:

I)                  Net present value approach

This is a method of determining current value of all cash flows generated from a project.

II)               Marginal productivity of capital

This is the extra output from an extra capital.

III)             Marginal efficiency of capital

This is the rate return expected from new capital asset over its lifetime.

IV)            Rigid accelerator theory and flexible accelerator theory

This theory states that investment increases when demand and income rise and decreases when income decreases.

V)               Tobin's Q-theory

it is achieved by dividing the market value of a company to its replacement cost.

3: Factors that influence investment.

The interest rates determine the cost of borrowing loans for investment.

Economic growth determines demand for investment.

Expectations such as profit and losses one will get after investing.

Inflation determines price of goods and services thereby affecting investment.

The government policy on investment like taxes on investment.

 4: Determinants of consumption

The taste and preference for consumers determines their demand to what they will consume.

 Price of substitutes and compliments.