economic questions?

Question

what is the function of money?
what is the life cycle hypothesis?
what is the permanent income hypothesis?

Answer 1

1. Money functions: medium of exchange, unit of account, starndard of deferred payment, and store of value.

2. The Life-Cycle Hypothesis is the Modigliani's Theory of consumption that says that households tend to have a more stabiilized consumption over time as they relate consumption to expected lifetime income. Therefore, a family saves while employed to accumulate wealth which will allow for consumption during retirement.

3. Permanent income is that income which households expect to receive over an exteded period. Hence, the hypothesis says that current income Y consist of permanent income YP and transitory income YT.

Hope this helped.

Answer 2

Money has 4 basic functions

1. Medium of Exchange: acts as a medium of exchange – hence permits a time interval between buying & selling commodities; thus eliminates need for a ‘double coincidence of wants’ implied by bartering, as one can sell G&S without simultaneously purchasing.

2. Store of Value: Able to perform function as Medium of Exchange because it retains value over time.

3. Standard of Deferred Payment: (closely related to Store of Value function) Loans & future payments are agreed & contracted in money terms, as money units are accepted as the means of settling future accounts.

4. Unit of Account: the unit of account in which prices quoted and accounting records kept.

The Life Cycle Hypothesis (LCH) and the Permanent Income Hypothesis (PIC) are very similar.

Both theories state that individuals will try and smooth their consumption over their lifetime by consuming a constant fraction of the present value of their lifetime income each year. For example if you think you will make 5 million over your lifetime and will live for 50 more years, consume 100,000 each year, even if that means you have to go in debt or save in any given year.

Answer 3

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