Exam (elaborations)
cnsr sci 255 exam 1 Questions & answers
cnsr sci 255 exam 1 Questions & answers
[Show more]
Content preview
cnsr sci 255 exam 1Absolute Income Hypothesis - ANS-▪ C = f(Y)
▪ Where Y = Current Income
- People's spending is dependent on current income. Consumption will be greater than
zero but less than one, so savings occurs. The rich save more than the poor.
- Keynes said that consumption is a stable function of current disposable income
(income after tax payment)
- used cross-sectional data from the United States during the 1920's and early 1930's,
arguing that consumption was a direct function of current income
Absolute Income Hypothesis weakness - ANS-▪ This theory is unfortunately,
ABSOLUTELY wrong when it comes to explaining long-term
income/consumption dynamics
▪ It's Ok, Keynes still get's A LOT of credit for defining critical concepts related to our
fiscal policy to this day
Permanent Income Hypotheses - ANS-- a theory of consumer spending which states
that people will spend money at a level consistent with their expected long term average
income
- Franco Madigliani and Morgan Friedman are responsible for Permanent Income and
Life-Cycle Hypotheses
life cycle hypothesis - ANS-- individuals plan their spending over their lifetimes, taking
into account their future income
- they take on debt when they are young, assuming future income will enable them to
pay the debt off
- They then save during middle age in order to maintain their level of consumption when
they retire
- This results in a "hump-shaped" pattern in which wealth accumulation is low during
youth and old age, and high during middle age
problems with Permanent and Life cycle Income Hypotheses - ANS-- shortcomings that
are evident:
- capital market assumptions
- bequests (the general assumption is that you die with nothing)
- time horizon knowledge
- unique problems raised in your readings: Regularity or Predictability of Income
,o big problem at the heart of trying to model things from the basic chart
Origins of Financial Insecurity - ANS-- Common Factors Cited:
1) Bad Behavior (irresponsible)
2) Lack of Financial Literacy
3) Lack of Willpower
Income inequality - ANS-- unequal distribution of household or individual income across
the various participants in an economy
- Each share of the population receives an equal share of aggregate income
- Each quintile (20% of population) receives 20% of aggregate income
Gini index - ANS-measure of income inequality that summarizes the dispersion of
income across the entire income distribution. Ranges from 0 (perfect equality) to 1
(perfect inequality)
Gini is based on the difference between: - ANS-Lorenz curve (the observed cumulative
income distribution)
- Perfectly equal income distribution
- used for a perfectly equal allocation of goods over a society
Absolute mobility - ANS-- a change in (inflation-adjusted) income
- measures how likely a person is to exceed their parents' family income at the same
age
relative mobility - ANS-- a change in position in the income distribution
- refers to how likely children are to move from their parents' place in the social
hierarchy
Income Mobility in the US - ANS-- has fallen over time
- Across the income distribution younger cohorts are earning more than their parents at
lower rates than past generations
- Distance between rungs of income ladder have widened
- Relative mobility has remained stable
- Within a single birth cohort (ages 0-18 in 1968), we see more absolute income mobility
than relative income mobility
Wage Stagnation - ANS-- Wage Growth Concentrated at the Top
- Wages have grown at a higher rate for the top 10%
- Median wages stagnant since 1970s
, - Wages have declined for bottom 10%
Income Volatility - ANS-- Over a two-year period, monthly income deviates (spikes and
dips) from average income
- Income volatility is more prevalent among the poorest 20% of families
- Growing income volatility for poorest families since 1980s especially in recessions
Coefficient of variation - ANS-This statistical measure assesses the ratio of the standard
deviation in income to the mean income level, and is used as a measure of income
volatility
Wealth Inequality - ANS-- Wealth Gap Widening 1989-2013
- Substantial growth in wealth holdings for richest 10%
- No growth in wealth holdings for bottom 50%
- Gap between richest and poorest families has widened since the late 1980s
- Negative net worth for bottom 20%
- Decay in net worth since 2000 for bottom 60% of wealth distribution
Social security origins - ANS-- Plan Establishment:
- Social Security Act of 1935 (New Deal Program, FDR)
- Modeled after English Poor Laws
- Response to the Great Depression
- Social Insurance Program (safety net) --- Not Public Assistance
SS Structure - ANS-- Intergenerational Compact --> the current workers pay for the
current retirees
- ^ the term applied to describe the structure of our social security system
- Originally Fully Funded Model (1939 it was modified)
SS Purpose - ANS-- The Three-Legged Stool of Retirement Preparedness
- private savings
- pensions
- social security
SS Function - ANS-- Operation
- 1950: 16 workers per retiree
- Currently: 2.9
- 2030 Projections: 2.0
- Boomer Working Years: Surplus, Trust Fund
- Viability of the Trust Fund as a long-term solution?
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller EXAMQA. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for CA$14.60. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
73773 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now