Posted: August 7th, 2022

Bringing Economics back to the Real World

Bringing Economics back to the Real World
Does APC change as current disposable income increases (you may need to calculate APC for a few different income levels using data from Figure 11-4, for example, to see what happens with APC)? (1 point)
An increase in income leads to a rise in consumption. In case consumption is higher than the income, the APC tends to decline. Finding out how revenue affects consumption is done through marginal propensity to consume (MPC). However, when income rises, the APC falls, but at less than that of MPC. APC is calculated by dividing the total household consumption by the total household income. More so, APC assists in determining the rate of consumption in a particular household.
Refer to the “There’s no such thing as permanent” article. Assignment help – Discuss Milton Friedman’s permanent income hypothesis and its relation to the observed trend with APC from above. (1 point)
Milton’s permanent income hypothesis states that consumer spending is determined by income and not consumption. For instance, if an individual’s pay rises, the person tends to spend more, anticipating more advancement in the future. According to Milton, consumption is considered more volatile compared to income. Additionally, the hypothesis states that the individual is expected to spend less or save more when the future income is uncertain. However, an individual’s liquidity is a significant factor when it comes to the management of their income and spending habits. Based on the observed trends, an increase in income leads to a rise in consumption, and a decrease in income leads to less consumption.
How is the debate presented in this article (from 2008) relevant in the U.S. economy today? (1 point).
The debate is relevant to the United States’ economy today, which is experiencing recessions due to factors such as the macro-economic impacts of the COVID-19. The article provides several solutions that would assist in addressing the current recession, such as the use of monetary policies. Based on Milton Fredman’s hypothesis, change in taxation would work because consumers will adjust their sending. As a result, they will be able to spend less and save more for the future. The article provides essential tips on addressing the economic issue, primarily through creating a change in the permanent income of Americans.
Refer to the “Reality cheque” article. While macroeconomic, including Milton Friedman, had been operating under the pretext that consumption is smoother than income, Angus Deaton found support for the opposite. Explain how Deaton’s model differs from the permanent income hypothesis. (1 point)
According to Milton Fredsmand, consumption is smoother than income, which is opposite to Deaton’s perspective. Deaton discusses the relationship between consumption and revenue and the difference between the two, which includes saving. According to Deaton, income is smoother than consumption. Deaton argues that the model of consumption provided by Milton does not align with real-life data, especially on how people respond to changes in prices despite the differences in income. Deaton’s model believes that aggregation issues contribute to changes in saving and consumption. Consumption is estimated by measuring the living standards, poverty levels, as well as demand analysis which considers the relationship between the prices quantities demanded and expenditures.
Work Cited
Kvangraven, Ingrid Harvold. “Nobel Rebels in Disguise—Assessing the Rise and Rule of the Randomistas.” Review of Political Economy 32.3 (2020): 305-341.

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