John Maynard Keynes Absolute Income Hypothesis - 1481 Words

The basis behind much of macroeconomic consumption theory rests with John-Maynard Keynes’ Absolute Income Hypothesis, described in The General Theory of Employment, Interest and Money (1936). His findings lead to the conclusion that aggregate consumption is highly dependent upon disposable income; but also, as total income increased, the proportions of savings would increase, meaning one’s marginal propensity to consume (MPC) would decrease. Leading to the assumption that consumers’ consumption decisions are made only by considering disposable income. Following Keynes Absolute Income Hypothesis, James Duesenberry developed the Relative Income Hypothesis (Duesenberry 1949). This theory asserts that consumption is not only based on one’s†¦show more content†¦Expanding upon the Life Cycle Hypothesis and the Permanent Income Hypothesis, Robert E Hall introduced the Random Walk model of Consumption (Hall 1978). Hall’s theory introduces rational expectations into the Life Cycle and Permanent Income Hypotheses. Stating that if rational expectations exist, then consumers will change their expectations as additional information becomes available to them. Variations in consumption are then only able to be explained by events that were unpredictable, as they would otherwise be smoothing consumption, which suggests that changes in consumption should be unpredictable as well. Evidence from Jesse Rothstein and Cecilia Rouse’s (Rothstein and Rouse 2007) research about how student loan debt affects post-college career choices suggests that recent college graduates behave in a manner that is not in accordance with life-cycle agents in. They create a regression-based estimator using difference-in-differences analysis (DID) combined with the Wald Test, with controls for variances that a simple version of DID/Wald would not be able to capture. The first of their results that can be of importance to consumption is that students wi th student loan debt were more likely to take higher-salary jobs over lower paying or â€Å"public interest† positions, which would result in higher pre-debt servicing disposable incomes. The claim that those with student loan debts are not life-cycle agents stems from data about the pledgesShow MoreRelatedDissertation Proposal1339 Words   |  6 Pagesstrategies has been a matter of controversy. Before Keynes (1936), many economists considered the interest to be the important factor to determine the propensity of saving. Keynes introduced ‘Absolute Income Hypothesis’ (AIH) in 1936 which demonstrated that fluctuations in the short run interest rate had no significant effect on spending decisions; rather the consumption behaviour is entirely dependent on current income. The theory asserts that as income rises, the consumption will also rise. HoweverRead MoreSmith s Attack On Mercantilism3631 Words   |  15 PagesBy this, he implied that a citizen was a propriet or of property instead of the property of an expert. Besides, Smith was a backer of setting duty rates as indicated by one s capacity to pay. Citizens, he contended, ought to pay in extent to the income which they individually appreciate under the security of the state. Smith put stock in burdened property, benefits, business exchanges, and wages. In any case, these duties ought to be as low as would be prudent to meet general society needs ofRead MoreEffects of Interest Rates on Business Performance4959 Words   |  20 PagesIntroduction This study aims at establishing the effects of interest rates on Mukwano industries (U) ltd. This chapter presents background of the study, statement of the problem, purpose of the study, objectives of the study, research questions or hypothesis, scope of the study, significance or justifications to the study and Theoretical framework. 1.1 Background of the study Mukwano Industries (U) Ltd was established in the early 1980s and has evolved to be one the fastest growing fully integratedRead MoreClassical Theory of Employment5251 Words   |  22 Pages Basic Assumptions of Say’s Law: * (a)  Ã‚  Ã‚  Perfectly competitive market and free exchange economy. * (b)  Ã‚  Ã‚  Free flow of money incomes.  Ã‚  All the savings must be immediately invested and all the income must be immediately spent. * (c)  Ã‚  Savings are equal to investment  and equality must bring about by flexible interest Rate. * (d)  Ã‚  Ã‚  No intervention of government  in market operations, i.e., a laissez faireRead MoreThe Main Theoretical Weaknesses of Mercantilism8168 Words   |  33 Pagesas it was in Mexico) or sugar (for example in the West Indies), as well as turning into high-class markets. European power did evolve all over the world but it was done through force which was a disadvantage that turned into a weakness. In 1690, John Locke argued his point that mercantilism was very weak. His reason was that the prices were varying in proportion to the amount of currency. Lockes Second Exposition also points in the direction of the heart of the anti-mercantilist evaluation: thatRead MoreEconomics12898 Words   |  52 Pagesprice of rice on consumption behavior, ceteris paribus (or other things remaining constant)? If the price of rice increased by 20 percent, how much consumption will there be, assuming no simultaneous change in other variables that is, assuming that income, number of family members, population, laws and so on all remain constant. Brief History: The Classical, Keynesian and Modern Economics This brief historical introduction aims to give a background on most profound names in the study of economicsRead MorePublic Expenditure and Economic Growth in India13502 Words   |  55 Pagesexpenditure of governments all over has significantly increased. In the early 20th Century, John Maynard Keynes advocated the role of public expenditure in determination of level of income and its distribution. In developing countries, public expenditure policy not only accelerates economic growth promotes employment opportunities but also plays a useful role in reducing poverty and inequalities in income distribution. ECONOMIC GROWTH Economic development is a broad term that generally refers toRead MoreTrade Openness and Economic Growth in Nigeria23422 Words   |  94 Pages(Thirlwall, 2000). Likewise, Fontagnà © and Mimouni (2000) noted that since the end of the European recovery after World War II, tariff rates have been divided by 10 at the world level, international trade has been multiplied by 17, world income has quadrupled, and income per capita has doubled. Incidentally, it is well known that periods of openness have generally been associated with prosperity, whereas protectionism has been the companion of recessions. In addition, the trade performance of individualRead MoreInflation Cause, Effects and Remedies11309 Words   |  46 Pagestrend of prices is gradual and irregular, averaging only a few percentage points each year, such creeping inflation is not considered a serious threat to economic and social progress. It may even stimulate economic activity: The illusion of personal income growth beyond actual productivity may encourage consumption; housing investment may increase in anticipation of future price appreciation; business investment in plants and eq uipment may accelerate as prices rise more rapidly than costs; and personalRead MoreExercises for Microeconomics17876 Words   |  72 PagesAverage benefit ââ€"Ž Average cost ââ€"Ž Economic surplus ââ€"Ž Economics ââ€"Ž Microeconomics ââ€"Ž Macroeconomics ââ€"Ž Marginal benefit ââ€"Ž Marginal cost ââ€"Ž Normative economics ââ€"Ž Positive economics ââ€"Ž Rational person ââ€"Ž Sunk cost ââ€"Ž Opportunity cost ââ€"Ž Absolute advantage ââ€"Ž Comparative advantage ââ€"Ž Attainable point ââ€"Ž Unattainable point ââ€"Ž Efficient point ââ€"Ž Inefficient point ââ€"Ž Production possibilities curve REVIEW QUESTIONS 1. The most you would be willing to pay for having a freshly washed car