Answer to Question #47021 in Macroeconomics for Shahniza almujahidah

Question

EFFECTIVENESS OF MONETARY POLICY UNDER LIFE CYCLE HYPOTHESIS

Answer 1

The life cycle model is a workhorse within modern macroeconomics, although it has been less popular in the past three decades than its single household cousin, the representative agent model.
The chief advantage of the life cycle framework is that, like the real world, it has plenty of heterogeneity - many different households making many different economic decisions. It also provides a natural and realistic setting for household borrowing and lending -- an essential feature if we are to understand the impact of monetary policy on credit markets.