Question

(Life-Cycle Hypothesis) According to the life-cycle hypothesis, what is the typical pattern of saving and spending for an individual over his or her lifetime? What impact does this pattern have on the saving rate in the overall economy?

Answer 1

Answer & Explanation:

Modiglani's Life cycle Hypothesis depicts spending & consumption pattern of people, in order to stabilise / or smoothen their consumprtion. The theory has following phases :

• Early (Non Working) Age, Low Income stage : Borrowings are done, to cover up for lack of income that yields desirable stable consumption level.
• Youth, Earning (Working) Age : Savings are done, through surplus of income level over desirable stable consumption level.
• Old, Post retirement (Non working age) : Dissavings are done, funds from previous savings are used to cover for lack of income that yields desirable stable consumption level.

Implication rate for entire economy saving rate : It implies that economy's savings rate is high, if more population comprises of middle aged working population.