Life Cycle Hypothesis

Topics: Investment, Stock and flow, Household income in the United States Pages: 2 (723 words) Published: June 5, 2012
Running Head: LIFE CYCLE HYPOTHESIS

Life Cycle Hypothesis
Jerry J. Palka

Case Study Analysis
Keynes believed that people who earns more and have more income would tend to save more as compared to people who have lower income levels. He was of the view that the richer persons have the ability to save more as they earn more whereas poor persons has limited income and thus, they tend to save less. It is true to some extent but new theories in the economies focused on a different approach and disregarded this theory since these theories believe that savings become constant after a limit and it does not increase with growing economy or income level (Dwivedi, 2005). The various theories on consumption and savings are proposed by economists to understand the savings pattern of the consumers. Among them one of the theories is life-cycle hypothesis which is also known as life cycle theory of consumption and saving. Ando and Modigliani had proposed this theory which disregards the theory proposed by Keynes. This theory believes that current consumption levels do not depend basically on current income levels (Dwivedi, 2005). Life Cycle Hypothesis believes that the typical pattern of savings and consumption particularly depends upon the age of the person, the availability of resources like the current wealth in addition to value of current and future income along with return on the capital invested. Typically, at young age people tend to take loans for their educational and homemade purposes. At the intermediate level, people starts to pay their debts and tend to increase their savings more whereas at the old age, people tend to withdraw their savings to make more and more consumption (Snowdon & Vane, 2002). There are persons who die in debt whereas there are persons who save lots for their children or save as they are not sure of their death. But generally this theory believes that people manages their plans in...
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