ECONOMICS Chapter Notes -Rational Expectations, Intertemporal Choice, Budget Constraint
9 Dec 2021
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Document Summary
The permanent-income hypothesis is based on fisher"s model of intertemporal choice. It builds on the idea that forward-looking consumers base their consumption decisions not only on their current income but also on the income they expect to receive in the future. Thus, the permanent-income hypothesis highlights that consumption depends on people"s expectations. Recent research on consumption has combined this view of the consumer with the assumption of rational expectations. the rational-expectations assumption states that people use all available information to make optimal forecasts. This assumption can have profound implications for the costs of stopping inflation. It can also have profound implications for the study of consumer behavior. The economist robert hall was the first to derive the implications of rational expectations for consumption. According to the permanent-income hypothesis, consumers face fluctuating income and try their best to smooth their consumption over time. At any moment, consumers choose consumption based on their current expectations of their lifetime incomes.
