unit 3 part 3 econ

What is consumption smoothing?

Households spread consumption evenly across time by saving and borrowing.

What is the life cycle model of consumption?

People borrow when young, save when earning more, and dissave in retirement to smooth consumption.

How do households react to temporary vs permanent shocks?

Temporary shocks: maintain long

What are idiosyncratic shocks?

Shocks specific to a household (e.g., job loss, illness).

What is self

insurance?

What is co

insurance?

What are credit constraints?

Limits on borrowing that prevent households from smoothing consumption.

What is present bias?

Households overvalue current consumption and under

How do credit constraints affect households in Africa?

Shallow financial markets limit borrowing, exposing households to deeper poverty during shocks.

Why is investment volatile?

Firms can postpone investment and it depends on profit opportunities, technology, and business confidence.

What is business confidence?

A coordinating factor that influences firms to invest simultaneously.

Which components of GDP are volatile?

Investment is highly volatile, government spending is more stable, exports/imports depend on global cycles.

What does the multiplier model explain about recessions and booms?

It shows how changes in spending cause amplified fluctuations in output and employment.