Author Question: Macroeconomics (Read 186 times)

brandy.spencer · **on:** Dec 4, 2019

Think about your spending habits prior to college, during college, and what you expect after graduation. How might your own financial decisions relate to the life-cycle theory of consumption? Also consider how interest rates may affect your consumption choices.

Celeste · **Reply #1 on:** Dec 4, 2019

According to the life-cycle theory of consumption, consumption decisions are based on permanent income only. As a college student, I consume more than I did when I was a high school student because my permanent income now is higher than it was in high school. Assuming I find a job upon graduation, my consumption will in turn increase, while at the same time begin to accumulate my earnings (begin to save) and stop saving once I retire. Depending on the interest-rates, it may change my outlook when purchasing a house or when obtaining a loan for a business venture. If the interest is too high, regardless of the principal I put in, the monthly fees may be too much to curb the costs of running a business or building my home.