B3 - Franco Modigliani Flashcards
In which decade did Franco Modigliani work to solve the consumption puzzle?
The 1950s
What is the central idea of Modigliani’s approach to consumption?
Consumption should depend on lifetime income, but income typically varies systematically over a person’s lifetime.
According to Modigliani, what role does saving play in a person’s financial life?
Saving allows income to be transferred from periods in which it is high to periods in which it is low.
What is the name of Modigliani’s hypothesis based on his observations about consumption and saving?
The Life-Cycle Hypothesis
What puzzle was Modigliani attempting to solve with his Life-Cycle Hypothesis?
The consumption puzzle identified previously, where consumption patterns did not align with Keynes’ conjectures over long periods.
What is the income pattern during work vs. retirement according to the Life-Cycle Hypothesis?
It is a fairly predictable income pattern where labor market income falls to zero upon retirement.
What is the goal regarding the standard of living during retirement?
To maintain a reasonable standard of living.
What is the saving strategy during working years according to the Life-Cycle Hypothesis?
Save during working years to support consumption during retirement.
Consider a consumer who expects to live for another T years. What are the key financial considerations for this consumer?
The consumer has wealth (W) and expects to earn income (Y) over the next R years until retirement.
What are the key financial components in planning for retirement according to the Life-Cycle Hypothesis?
Wealth (W), expected income (Y) over the remaining working years (R), and the total expected lifespan (T).
