Question

Macro

3. The reform in the capital market allows the household to borrow today in order to consume. Assume that previous to the reform households could not borrow money. Anaylze the influence of the reform on the private consumption using the Modiligiani’s life cycle model.

Answer 1

The reforms in private consumption pattern has totally refuted the previos economic theories which state that borrowing is a curse but saving is boon.life cycle theory on consuption was developed by franco modigliani in 1957, which states that people plan their consumption pattern throughout their lifecycle as per their income level.

HIGHLIGHTS OF THE MODIGLINI MODEL

*As per the model ,in the initial years of life ,say upto 20,people have to borrow in order to maintain consumption level .During this period ,they take study loans etc

*With the increase in age ,they start earning more as it is their working age ,being youthful, a person does overtime in workplace to earn more only to save more.This phase is upto 40-45 years.

In the third phase of life ,the people approach towards retiring age ,they start to earn less and use their saved wealth during young age for meeting their consumption needs.

ANaLYSIS OF THE THEORY

The theory propounded by modigliani truly holds good on the people of 20 th century who tend to save during youth for future retiment age.that time around 70-75 % people used to follow this pattern.but now in 21 st century ,this model is somewhat outdated....today ther is further reforms in the income and consumption pattern if people.

*Today,people believe in --- spend today ,who has seen the future.

* People live their leisure life during the young age by least worrying about future or retirement age.

* Today ,the studying age doesnot end up just in 20 s rather on average till 25 years of age ,the keep on spending on education,

* The earning age doesnt end up at 40-45 only rather on average ,today people continue to earn till 55 years of age in full swing.

* Mostly people with excess income ,dont have financial knowledge to plan their savings

*Low income groups ,dont have spare money to plan for retiring age.

Ever at retiring age ,people continue to do work to rarn their livelihood .they dont need to depend upon their chilhdren for their needs.

This way analysing all these points ,i come to the conclusion that ,the lifecycle pattern developed by modigliani has brought about a big reform in private consumption pattern yet there is a need for further reform in it ,keeping in mind the present senario of todays forward thinking of people.

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