Summer 2019 BUS 535 Economics Assignment: Life Cycle Model Analysis

This economics assignment addresses key concepts such as life cycle theory, national savings rates, and consumption patterns in response to demographic changes, particularly the increasing elderly population. It explores the implications of these changes on business and industry. The assignment delves into the life cycle model, examining why the elderly may not dis-save as much as predicted, and analyzes the impact of savings accounts with different withdrawal policies. Additionally, it examines the effects of economic factors like stock market crashes, investment tax credits, and housing prices on consumer spending, investments, and overall economic growth. The solution provides detailed explanations and analysis of these economic issues, supported by relevant references.

Running head: ECONOMICS 1
Economics Assignment
Name
Affiliation
Date

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Qn 1. Life cycle theory is briefly defined as the way how people plan their level of consumption
and savings in their years ahead. In 20years time, the national savings rate will increase
since elderly tend to save because of the attached responsibilities. Since the level of
consumption will be reduced, firms should cut on the level of production to effectively
meet the demand of goods by that time (Pettinger, 2017).
Qn 2(a). Life cycle theory explains that, the elderly people become weak and they cannot work
to earn and later save. However, this scenario is not applicable in the changing world
where everyone works hard to put his or her family to live a better life (Kenton, 2018).
People do save to meet their responsibilities and avoid begging.
(b). The study that elderly people who do not have children dis-save. Those with children save
and people without children do not have responsibilities thus ending up dissaving.
Whereas elderly with children do save because of the sense of responsibility to live the
family with a better life and also cater for some needs. This scenario violate the life cycle
model which advocates for dis-saving in old age, thus the study still remains at a
standstill
Qn3 (a). Daily savings account, this account is at times called a money demand saving account
in different financial institutions such as banks. Time to time withdrawing of funds, help
the user to fund all the needs or unforeseen circumstances such as sicknesses, accidents,
among others can be catered for especially when using money demand account.
(b). Fixed saving accounts limit the individual’s desires of withdrawing funds from the banks at
any time he or she demands for it.

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(c). According to modern economists, saving has a positive relationship with consumption. There
is no need of just keeping money without consuming it. The choice in (b) above violates
the utility model (Faimus membership level, 2018).
Qn.4. The theory of life cycle assumes that, consumption and saving cannot depend on the
lifetime income but depends on expectations of the lifetime income (Larry, et al, 2011).
When the credit is lowered, for example when the credit level is reduced, parents tend to
pay for their children school fees even though they have needs, the consumption level
therefore reduces as the children are educated.
Qn 5. Most people have limited income levels. People have low income whereby consumption is
more than saving, thus making the majority of the people to miss out the expectations of
catering for the future. The mismatch could have been caused by lack of permanent jobs
to increase on the peoples’ capacity of income; poor planning caused by ignorance
among people could have brought such a behavior (Basco et al, 2018).With industries in
operation, the increase for the payments of workers, increases on their disposable income
in order to increase the level of savings.
Qn. 6a). An anti-inflationary monetary policy means a fixed monetary policy which decreases
the circulation of money in an economy. The Anti-inflationary monetary policy leads to
an increase in the level of interest rate which then rises the cost of capital. Marginal
product of capital changes in relation to the cost of capital. This is therefore useful for the
firms in operation.
b) The real rental price is proportional to the marginal product of capital. When an earthquake
destroys the capital stock without causing death to any individual but harms them, the

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labor force will be reduced, marginal product of capital will increase and finally the real
interest rates increase.
c) As foreign workers increase, the size of labor force in the country increases. Also, marginal
product of capital rises and the real rental price of capital (The Nationals Academies
Press, 2017). Since the marginal product of capital to the cost of capital remains constant,
then firms find it beneficial to increase its investments.
d) Improvement in computer technology results into efficient production of goods and services.
The marginal product of labor rises, the rental price of capital becomes high and the cost
of capital also increases thus it becomes beneficial for the firm to invest.
Qn.7. When the stock markets crash, there are several consequences caused as below;
Investment; investment levels reduces, since most of the investors aim at maximizing capital.
This is caused by the increasing cost of production (Amadeo, 2019).
Consumption; the level of consumption reduces since most of prices of goods are high
Aggregate demand; with the reduction in investments, this lowers levels of supply thus aggregate
demand is increased.
Federal reserves should be lowered in order to reduce on the interest rates on loans thus making
easy for companies to access funds for expansion.
Qn8. Economic recession is defined as, the situation where a country has low levels of level of
economic activities. For the scenario of investment tax credit, the country will remain
with low level of economic activities (Boyce, et al, 2018). Investments increase the level
income through taxing to finance other sectors to create more economic activities such as

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jobs. Her campaigns will leave the country in recession since they favor firms which are
supposed to pay taxes to enhance government economic activities such as employment
opportunities, manufacturing industries among others (Reid, 2013).
Qn.9The increase in housing prices has boosted consumer spending. This improves the
economic growth of the country (Kane, 2019). However, a larger reduction in housing
prices generally affects consumer’s attitude towards construction of houses and thus a
low level of economic growth.
Furthermore, a rise in house prices leads to poor distribution of wealth among the people in a
country. This rises the wealth of those who own houses and reduces the standards of
those who do not own houses.

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References
Amadeo.K. (2019). Stock Market Crash, Its Causes, Effects, and How to Protect Yourself.
https://www.thebalance.com/stock-market-crash-examples-cause-impact-3305864
Basco.D, Gutierrez. C.I, Graf.M. ( 2018). The Role of Public Policy in Supporting Business
Accelerators. https://www.rand.org/pubs/working_papers/WR1271.html
Boyce J., Delaney, J. & Wood, A. (2018). The Great Recession and subjective well-being: How
did the life satisfaction of people living in the United Kingdom change following
thehttps://journals.plos.org/plosone/article?id=10.1371/journal.pone.0201215.
FaimusMembership Level.(2018).Theories of
Consumption.https://www.kenyaplex.com/resources/14494-theories-of-consumption.aspx
Kane.M.(2019). Tax Law Review. The Premier Law School Journal for Tax Policy Scholarship.
https://www.law.nyu.edu/tax/taxlawreview.
Kenton. W.(2018). Life Cycle Hypothesis.https://www.investopedia.com/terms/l/life-cycle-
hypothesis.asp
Larry .R. F. Sr,John. B. M. D, Wade D. P. (2011).Lifetime Expected Income Breakeven
Comparison between SPIAs and Managed Portfolios.
https://www.onefpa.org/journal/Pages/APR14-Lifetime-Expected-Income-Breakeven-
Comparison-between-SPIAs-and-Managed-Portfolios.aspx.
Reid,N. , Carroli,M &Ye,X.(2013). The Great Recession of 2007-2009. Retrieved from
https://journals.sagepub.com/doi/abs/10.1177/0891242413485633.

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Pettinger.T. (2017). LifeCycle Hypothesis.
https://www.economicshelp.org/blog/27080/concepts/life-cycle-hypothesis/
The Nationals Academies Press. (2017). Employment and Wage Impacts of Immigration.
Theory. https://www.nap.edu/read/23550/chapter/8.