Answer to Question #259907 in Macroeconomics for JAMES

Question

(a) Explain the criticism of life cycle theory of consumption. (5 marks)

(b) Macroeconomic models are simplified explanations or theories of how the economy works.

Discuss the importance of economic models. (5 marks)

Answer 1

a.

• The life cycle hypothesis accepts that every family in settling on utilization choices has consistently a distinct, cognizant vision of the family's future size and structure, including the future of every part; of the whole lifetime profile of the pay from work of every part after the then appropriate taxes; of the present and future extentnand terms of any credit accessible to it; of things to come crises, openings, and prevalent difficulties which will encroach upon its utilization spending. 
• One more criticism of the life cycle approach is that it neglects perceive the presence of liquidity constraints. Regardless of whether a family had a substantial vision of future income, there is little an open door in certifiable capital business sectors for getting for a significant stretch based on anticipated future income.

b.

• A economic model is a mirror of reality that allows us to observe, comprehend, and make expectations about economic conduct. The reason for a model is to take a perplexing, certifiable circumstance and pare it down to the basics. 
• Its essential reason for existing is to clarify and examine costs and amounts exchanged a competitive market. The model's conditions decide the degree of market demand and supply as an element of cost and different factors (for instance, pay). 
• Economics specialists convey a bunch of models in their minds like a woodworker hauls around a tool stash. At the point when they see a financial issue or issue, they go through the models they know to check whether they can observe one to be that fits. Then, at that point, they utilize the model to determine experiences about the issue or problem.