Suppose consumers anticipate that their wealth will grow over ...

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Suppose consumers anticipate that their wealth will grow over time, because of interest earnings and capital gains. According to the life-cycle hypothesis, such optimism should cause current consumption to be ________.
 
  A) relatively low
  B) relatively insensitive to changes in income
  C) rising as individuals near retirement age
  D) relatively high

Question 2

Suppose that a technological advance raises total factor productivity. Explain, step-by-step, how the economy adjusts to arrive at a new long-run equilibrium.
 
  What will be an ideal response?

[cascooper22]

Answer to Question 1

D

Answer to Question 2

The marginal products of both labor and capital increase, so both demand curves shift up. Since the factor supplies are fixed, there can be no increase in factor utilization, but output has risen, because both factors are more productive. At the original factor prices, there is now excess demand, which causes both the real wage and the rental price of capital to rise. These increases in factor prices distribute the increased output to the inputs, so that the income share of each input in total output does not change. The factor prices stop rising when they are equal to the higher marginal product that results from the improved technology.

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Excellent

[momolu]

TYSM