Question

4 and 5 plz

4. A recent college graduate has just started their career, and is currently earning barely enough to pay their rent. They expect rapid pay increases, however. They have decided to wait until their pay rises a bit more to buy a house. Is this behavior consistent with the permanent income hypothesis? Explain your answer. 5 points. 5. Explain what is meant by the phrase the Fisher Effect. Please draw 2 clearly labelled separate graphs, one with the nominal interest rate and the other with the real interest rate. 10 points.

Answer 1

Answer 4

According to the theory of permanent income hypothesis , the people will spend money at a level which is constant or consistent with their long term average income ( expected ) .This long term average then becomes as the permanent income level which can be safely spent .In order to guard against the future decline in the income, a worker will save only if the income (current) is higher than the expected level of permanent income.Now in this case .Yes this behaviour is consistent with the permanent income hypothesis we just discussed above because this college graduate is trying to save his money or is not spending because of this short term crisis in his income but with the anticipation level of permanent income he is waiting in income boost in order to buy the house .