Book: Expectations Consumption And Investment Flashcards
Foes expectations affect consumption and investments
Yea
What is the essence if the permanent income theory or the life cycle theory of consumption
That consumers plan their consumption beyond their immediate disposable income
What is a persons human wealth
The time value of ones labor over ones remaining working life
What is non human wealth
Sum of financial wealth and residential wealth
How does expectations influence consumption
As consumption is both a function of current and total future income expectations affect consumption through the view of future sustained consumption. In recessions consumption is not hit as hard as the rest of the economy unless consumers get really scared
When should a firm invest in new real capital
When the present value of the profits minus depreciations are larger than the initial cost
What are static expectations
That the future will be the same as now
Shat is the user cost or rental costs of capital
Real interest rate plus depreciation
How is the profit rate calvulated
Profit / rental cost if capital
Is there a positive relation between current profits and investment of firms
Yes the graphs align
How does future expected output affect investment
Higher expected output means higher expected profit which means higher investment
What are some similarities between consumption and investment decitions
Both depend on both temporary and total future expected income and both adapt their habits only if they think the change in income is not transitory
Why is investment more volatile than consumption
Because consumers adapt their habits in proportion to expectations while investing is more a large binary decision that is simply made when the future looks bright leading to a much greater percentage change although as investment is a smaller part of the economy the change affects it about as much as the changing consumption
