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cnsr sci 255 exam 1 Questions & answers
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cnsr sci 255 exam 1Absolute Income Hypothesis - ANS-▪ C = f(Y)
▪ Where Y = Current Income
- People's spending is dependent on current income. Consumption will be greater than
zero but less than one, so savings occurs. The rich save more than the poor.
- Keynes said that consumption is a stable function of current disposable income
(income after tax payment)
- used cross-sectional data from the United States during the 1920's and early 1930's,
arguing that consumption was a direct function of current income
Absolute Income Hypothesis weakness - ANS-▪ This theory is unfortunately,
ABSOLUTELY wrong when it comes to explaining long-term
income/consumption dynamics
▪ It's Ok, Keynes still get's A LOT of credit for defining critical concepts related to our
fiscal policy to this day
Permanent Income Hypotheses - ANS-- a theory of consumer spending which states
that people will spend money at a level consistent with their expected long term average
income
- Franco Madigliani and Morgan Friedman are responsible for Permanent Income and
Life-Cycle Hypotheses
life cycle hypothesis - ANS-- individuals plan their spending over their lifetimes, taking
into account their future income
- they take on debt when they are young, assuming future income will enable them to
pay the debt off
- They then save during middle age in order to maintain their level of consumption when
they retire
- This results in a "hump-shaped" pattern in which wealth accumulation is low during
youth and old age, and high during middle age
problems with Permanent and Life cycle Income Hypotheses - ANS-- shortcomings that
are evident:
- capital market assumptions
- bequests (the general assumption is that you die with nothing)
- time horizon knowledge
- unique problems raised in your readings: Regularity or Predictability of Income
,o big problem at the heart of trying to model things from the basic chart
Origins of Financial Insecurity - ANS-- Common Factors Cited:
1) Bad Behavior (irresponsible)
2) Lack of Financial Literacy
3) Lack of Willpower
Income inequality - ANS-- unequal distribution of household or individual income across
the various participants in an economy
- Each share of the population receives an equal share of aggregate income
- Each quintile (20% of population) receives 20% of aggregate income
Gini index - ANS-measure of income inequality that summarizes the dispersion of
income across the entire income distribution. Ranges from 0 (perfect equality) to 1
(perfect inequality)
Gini is based on the difference between: - ANS-Lorenz curve (the observed cumulative
income distribution)
- Perfectly equal income distribution
- used for a perfectly equal allocation of goods over a society
Absolute mobility - ANS-- a change in (inflation-adjusted) income
- measures how likely a person is to exceed their parents' family income at the same
age
relative mobility - ANS-- a change in position in the income distribution
- refers to how likely children are to move from their parents' place in the social
hierarchy
Income Mobility in the US - ANS-- has fallen over time
- Across the income distribution younger cohorts are earning more than their parents at
lower rates than past generations
- Distance between rungs of income ladder have widened
- Relative mobility has remained stable
- Within a single birth cohort (ages 0-18 in 1968), we see more absolute income mobility
than relative income mobility
Wage Stagnation - ANS-- Wage Growth Concentrated at the Top
- Wages have grown at a higher rate for the top 10%
- Median wages stagnant since 1970s
, - Wages have declined for bottom 10%
Income Volatility - ANS-- Over a two-year period, monthly income deviates (spikes and
dips) from average income
- Income volatility is more prevalent among the poorest 20% of families
- Growing income volatility for poorest families since 1980s especially in recessions
Coefficient of variation - ANS-This statistical measure assesses the ratio of the standard
deviation in income to the mean income level, and is used as a measure of income
volatility
Wealth Inequality - ANS-- Wealth Gap Widening 1989-2013
- Substantial growth in wealth holdings for richest 10%
- No growth in wealth holdings for bottom 50%
- Gap between richest and poorest families has widened since the late 1980s
- Negative net worth for bottom 20%
- Decay in net worth since 2000 for bottom 60% of wealth distribution
Social security origins - ANS-- Plan Establishment:
- Social Security Act of 1935 (New Deal Program, FDR)
- Modeled after English Poor Laws
- Response to the Great Depression
- Social Insurance Program (safety net) --- Not Public Assistance
SS Structure - ANS-- Intergenerational Compact --> the current workers pay for the
current retirees
- ^ the term applied to describe the structure of our social security system
- Originally Fully Funded Model (1939 it was modified)
SS Purpose - ANS-- The Three-Legged Stool of Retirement Preparedness
- private savings
- pensions
- social security
SS Function - ANS-- Operation
- 1950: 16 workers per retiree
- Currently: 2.9
- 2030 Projections: 2.0
- Boomer Working Years: Surplus, Trust Fund
- Viability of the Trust Fund as a long-term solution?
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