Question

Briefly explain whether each of the following statements is true or false. Also explain with graph please.

1 The endogenous growth predicted by the AK model is due to the assumption of a constant marginal product of capital.

2.The permanent income theory of consumption predicts that saving responds less to permanent changes in income than temporary changes in income.

Answer 1

Answer-1. True

''The endogenous growth predicted by the AK model is due to the assumption of a constant marginal product of capital'', this statement is True. The basis of the first model of endogenous growth theory, which is known as the AK model. The AK model assumes that when people accumulate capital, learning by doing generates technological progress that tends to raise the marginal product of capital, thus offsetting the tendency for the marginal product to diminish when technology is unchanged. The model results in a production function in the form Y = AK, in which the marginal product of capital is equals to the constant A.

Answer-2. False

''The permanent income theory of consumption predicts that saving responds less to permanent changes in income than temporary changes in income'', this statement is False. The permanent income hypothesis is a theory of consumer spending stating that people will spend money at a level consistent with their expected long-term average income. The level of expected long-term income then becomes thought of as the level of “permanent” income that can be safely spent. The consumer can then make an estimation of anticipated lifetime income. A consumer saves more only if they expect that their long-term average income or their permanent income, will be increase. So, the permanent income theory of consumption predicts that saving responds more to permanent changes in income than temporary changes in income.