Test-2 23rd November 2022

Max. Marks: 20

Attempt all the questions.

Q1. Explain the basic idea of adaptive expectation hypothesis. Explain how this hypothesis is based on a flawed
premise of model-inconsistency. (4)

Test-2 23rd November 2022

Max. Marks: 20

Attempt all the questions.

Q1. Explain the basic idea of adaptive expectation hypothesis. Explain how this hypothesis is based on a flawed
premise of model-inconsistency. (4)

Test-2 23rd November 2022

Max. Marks: 20

Attempt all the questions.

Q1. Explain the basic idea of adaptive expectation hypothesis. Explain how this hypothesis is based on a flawed
premise of model-inconsistency. (4)

Test-2 23rd November 2022

Max. Marks: 20

Attempt all the questions.

Q1. Explain the basic idea of adaptive expectation hypothesis. Explain how this hypothesis is based on a flawed
premise of model-inconsistency. (4)

Test-2 23rd November 2022

Max. Marks: 20

Attempt all the questions.

Q1. Explain the basic idea of adaptive expectation hypothesis. Explain how this hypothesis is based on a flawed
premise of model-inconsistency. (4)
Q2. (i) In a two period consumption optimization model given by Irving Fisher suppose the individual’s c0 < y0, where
c is consumption, y is income and r is rate of interest on borrowing and saving. Consider a consumer’s preferences
over current and future consumption given by U (c0, c1). Show the utility maximization point with the help of a
diagram. (6)
(ii) How would this consumption be affected in period 0 and 1 if income increases in period 0 and if interest rate on
savings increase? Consider consumption has normal good property. (4)
Q3. In the Life Cycle hypothesis an individual’s consumption is proportional to Present Value of future income.
Explain the factors that determine the Present Value. Assuming capital markets to be working efficiently, if there is
an unexpected increase in income from real estate how would it affect consumption? (6)

Q2. (i) In a two period consumption optimization model given by Irving Fisher suppose the individual’s c0 < y0, where
c is consumption, y is income and r is rate of interest on borrowing and saving. Consider a consumer’s preferences
over current and future consumption given by U (c0, c1). Show the utility maximization point with the help of a
diagram. (6)
(ii) How would this consumption be affected in period 0 and 1 if income increases in period 0 and if interest rate on
savings increase? Consider consumption has normal good property. (4)
Q3. In the Life Cycle hypothesis an individual’s consumption is proportional to Present Value of future income.
Explain the factors that determine the Present Value. Assuming capital markets to be working efficiently, if there is
an unexpected increase in income from real estate how would it affect consumption? (6)

Q2. (i) In a two period consumption optimization model given by Irving Fisher suppose the individual’s c0 < y0, where
c is consumption, y is income and r is rate of interest on borrowing and saving. Consider a consumer’s preferences
over current and future consumption given by U (c0, c1). Show the utility maximization point with the help of a
diagram. (6)
(ii) How would this consumption be affected in period 0 and 1 if income increases in period 0 and if interest rate on
savings increase? Consider consumption has normal good property. (4)
Q3. In the Life Cycle hypothesis an individual’s consumption is proportional to Present Value of future income.
Explain the factors that determine the Present Value. Assuming capital markets to be working efficiently, if there is
an unexpected increase in income from real estate how would it affect consumption? (6)

Q2. (i) In a two period consumption optimization model given by Irving Fisher suppose the individual’s c0 < y0, where
c is consumption, y is income and r is rate of interest on borrowing and saving. Consider a consumer’s preferences
over current and future consumption given by U (c0, c1). Show the utility maximization point with the help of a
diagram. (6)
(ii) How would this consumption be affected in period 0 and 1 if income increases in period 0 and if interest rate on
savings increase? Consider consumption has normal good property. (4)
Q3. In the Life Cycle hypothesis an individual’s consumption is proportional to Present Value of future income.
Explain the factors that determine the Present Value. Assuming capital markets to be working efficiently, if there is
an unexpected increase in income from real estate how would it affect consumption? (6)

Q2. (i) In a two period consumption optimization model given by Irving Fisher suppose the individual’s c0 < y0, where
c is consumption, y is income and r is rate of interest on borrowing and saving. Consider a consumer’s preferences
over current and future consumption given by U (c0, c1). Show the utility maximization point with the help of a
diagram. (6)
(ii) How would this consumption be affected in period 0 and 1 if income increases in period 0 and if interest rate on
savings increase? Consider consumption has normal good property. (4)
Q3. In the Life Cycle hypothesis an individual’s consumption is proportional to Present Value of future income.
Explain the factors that determine the Present Value. Assuming capital markets to be working efficiently, if there is
an unexpected increase in income from real estate how would it affect consumption? (6)