Question

According to Hall, consumption spending follows a random walk. 1. What determines changes in consumption in this case? 2. What is the implication of following a random walk for predicting changes in consumption? What is the impact on current consumption of a temporary tax cut according to: 3. the Keynesian consumption function? 4. the permanent-income hypothesis?

Answer 1

1) Robert hall was the first person to derive the effects of rational expectations for the consumption. at any given time a consumer select their own consumption which is based on their present expectations of their income of the lifetime. holiday pics that the consumption obeys the AR process is the hypothesis of the life cycle permanent income comes true.
2) The economist Robert hall introduced the random walk model of the consumption. This model basically used the eula numerical method for the model of consumption. All had created his own theory of consumption in reaction to the Lucas critique. by using the eula equation to the random walk of consumption model it has come out as a dominant approach to the modelling of consumption.
3)the keynesian consumption function depicts that the expenditure on aggregate real consumption in an economy is the function of the real national income. In an economy for aggregate consumption can be got from the consumption expenditure of different people who are purchasing commodities. permanent tax cut have a more deep effect on the expectations of a long run income then the temporary tax cut. Propensity to consume of of the households depend on the confidence of the financial prospect in a long-term which under different circumstances that temporary tax karte does little for improvement. a temporary tax cut is substantially less effective compared to the permanent card for generating the economic growth.
4)the permanent income hypothesis is the theory regarding the consumer spending which states that people tend to spend the money at a consistent level along with their average income in a long run. The expected income in a long run at that time becomes as the level of the permanent level of income which can be spent safely.