Question

ECONOMICS

Kindly answer the following:

Explain what decisions and calculations a very foresighted consumer must make to determine her consumption decisions in any period.

Explain why current consumption is likely to respond less than one for one to changes in current income.

Suppose individuals expect future output to be higher and future interest rates to be higher. Given this information, how will individuals alter consumption in the current period? Explain.

Suppose individuals expect future output to be lower and future interest rates to be lower. Given this information, how will individuals alter consumption in the current period? Explain.

Explain how expectations affect consumption.

Explain how a change in expected future output could affect current output.

Explain why consumption is less volatile than investment.

Are changes in consumption and investment typically occur in the same direction and at roughly the same magnitude? Explain.

Suppose firms expect future output to be higher and future interest rates to be higher. Given this information, how will firms alter investment in the current period? Explain.

Suppose firms expect future output to be lower and future interest rates to be lower. Given this information, how will firms alter investment in the current period? Explain.

Answer 1

Answer 1-A foresighted consumer is one who care for the future make decisions by looking forward in making decisions. A foresighted consumer while making consumption decisions in any period always calculates the amount of wealth he/she possess and the expected future income. These wealth may be financial wealth, housing wealth,and human wealth. The foresighted consumer must also make expectations regarding future rates of interest, taxes etc throughout the his/her entire life. Once done with making all the calculations about the present and future income, wealth, taxes and rates of interets, the consumer then allocate his/her resources evenly throughout present and future to maintain a smooth consumption line throughout his/her life.

If the present consumption expenditure exceeds the available resources to buy it, the consumer would borrow money to meet the consumption requirement. There is always a choice (trade-off) between current consumption and future consumption. So in making consumption decisions households have to take into consideration their expected future income as also the consumption of goods and services they are likely to be able to afford.