Borrowing to Enable Anticipatory Consumption
According to the life cycle model, individuals can increase their consumption in anticipation of future income growth, such as a promotion. This is possible because the model assumes access to credit. For example, an individual with strong career prospects might secure a loan or mortgage to achieve a higher standard of living before their income actually increases, effectively consuming against their future earnings.
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Introduction to Macroeconomics Course
Ch.3 Aggregate demand and the multiplier model - The Economy 2.0 Macroeconomics @ CORE Econ
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Anticipatory Consumption Changes in the Life Cycle Model
An individual begins their career, receives a significant promotion after several years, and eventually retires. According to the stylized, step-wise model of an individual's life-cycle income, which of the following statements accurately describes the relationship between their income levels at these different stages?
Based on the stylized, step-wise model of an individual's life-cycle income, arrange the following life stages in ascending order of their corresponding income level (from lowest to highest).
Applying the Stylized Life Cycle Income Model
According to the stylized, step-wise model of an individual's life-cycle income, income is assumed to grow continuously and at a steady rate from the start of a career until retirement.
Describing the Stylized Life Cycle Income Path
Match each stage of an individual's working life, as described by the stylized, step-wise life cycle model, with the corresponding income level characteristic.
In the stylized, step-wise model of an individual's life cycle, income upon retirement is depicted as a constant level that is lower than the post-promotion income but higher than the ____ income.
Analysis of Income Shifts in the Stylized Life Cycle Model
An economist is analyzing the income paths of four individuals to see how well they fit the stylized, step-wise life cycle model, where income is constant within each major life stage (initial career, post-promotion, and retirement). Which of the following individual income paths is INCONSISTENT with the specific assumptions of this model?
A financial analyst is modeling an individual's potential lifetime earnings. The model shows the individual's income increasing by a small, fixed percentage each year following a major promotion. Which specific assumption of the stylized, step-wise life cycle model of income is violated by this detail?
Borrowing to Enable Anticipatory Consumption
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Financial Decision of a Medical Resident
A recent engineering graduate has accepted a high-paying job that starts in three months. Until then, she has very little income but has a firm job offer letter. Which of the following actions best demonstrates the principle of consuming in anticipation of future income?
A person who anticipates a significant future income increase and has access to borrowing should, according to the principle of consumption smoothing, immediately increase their spending to a level equal to their expected future income.
Rationale for Early Career Borrowing
Evaluating the 'Access to Credit' Assumption