Case studies


Case1: The Life-Cycle Hypothesis

Q1.According to the life-cycle hypothesis, what is the typical patternof saving for an individual over his/her lifetime? What impact doesthis behaviour have on an individual’s lifetime consumptionpattern? What impact does the behaviour have on the saving rate inthe overall economy?

Thelife-cycle cycle hypothesis has an impact on an individual savingover his or her lifetime in that it helps to monitor the habits ofsaving and spending in relation to expenses debt. The hypothesisstates that an individual spending commonly increases at early yearsof working and during the retirement years (McEachern,2012).At these two points, there is high consumption rate. In addition, thehypothesis states that at early years of working, an individualincurs high expenses and debt rates. At this time, generating ofincome is weak thus greater consumption. Similarly, towards the endof working years, the hypothesis predicts a greater tendency todevelop ways to enable savings. Saving rate affects the overalleconomy whereby the national overall savings rate balances. Thesaving from middle of one’s life offsets spending in the latterlife. Therefore, the overall economy saving rate is cancelled bydissaving. Similar to the how aggregate savings of an individualoffsets by dissaving, the same case occurs at national level.

Case 2: Investment Varies Much More Than Consumption

Q1.Why do economic forecasters pay special attention to investmentplans? Which of those indicators might affect investment?

Economicforecasters pay special attention to investment plans because theplans have a great deal with whether the economy shrink or grow. Oneof the main objectives of forecaster is to predict how the economywill change in future. It figures out the rate at which the economywill grow or shrink. They need to know whether investment is high,meaning that the economy will expand. On the other hand, they shouldtell when the investment is low, meaning there will be few jobshence, economy shrinks. Conference board gives ten differentindicators for the United States economy (McEachern,2012).However, all of these indictors affect the investment in one way orthe other. For instance, if a manufacturing company increases weeklyworking hours, it might need extra capital goods to maintain all itsworkers. Similarly, if the consumer’s expectations are high, thecompany will require more capital goods to produce more consumergoods. Hence, the company will invest to meet the consumer demand.


McEachern,W. A. (2012). ECON Macro 3 (3rd ed.). Mason, OH: South-Western.