Essay On Life Cycle Hypothesis

816 Words4 Pages
The economic theory "Life-cycle Hypothesis" implies that individuals plan out their spending and make sure that they keep it constant throughout their lifetime. So basically this theory implies that the life-cycle hypothesis is based on the idea that an individual will plan out how much he/she will spend throughout their lifetime and have that remain a constant. This Levno 2 theory goes against the idea of saving a lot of money for a period of time then splurging it for another period; the spending must remain at a constant rate. With the hypothesis of this theory, we can gather that, theoretically, you can find the aggregate consumption function based on one individuals spending. The Life-cycle Hypothesis explains that an individual goes through three stages regarding his spending. The first stage being in early working life, the second being mid-working life, and finally, the third stage being retirement. The stage of early working life explains that this individual is said to spend more than what he-she earns at work. In this stage of spending, the individual attains…show more content…
Because of this relationship, external factors in investments would not have a “constant multiplier effect.” This relationship is shown clearer in the “Permanent Income Hypothesis”, which implies that an individual would need to decide if a change in their income would be temporary or not. If the individual determines whether the change in income is permanent, the individual would, hypothetically, take a small repercussion in terms of his/her spending habits. If the individual came to the conclusion that the change in income was permanent, then there would be a more substantial change in his/her spending habits. Both of the theories are not targeted towards a specific “household”, they are more directed towards an economy’s
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