6 Explain the following

A Irvin Fischer’s Model and Intertemporal choice Irving Fisher developed the
theory of intertemporal choice in his book Theory of interest (1930). Contrary to Keynes,
who related consumption to current income, Fisher's model showed how rational
forward looking consumers choose consumption for the present and future to maximize
their lifetime satisfaction.
According to Fisher, an individual's impatience depends on four characteristics of his
income stream: the size, the time shape, the composition and risk. Besides this,
foresight, self-control, habit, expectation of life, and bequest motive (or concern for lives
of others) are the five personal factors that determine a person's impatience which in
turn determines his time preference.
B Modigliani’s Life cycle Hypothesis model The Life Cycle Hypothesis(LCH) model
defines individual behavior as an attempt to smooth out consumption patterns over
one's lifetime somewhat independent of current levels of income. This model states that
early in one's life consumption expenditure may very well exceed income as the
individual may be making major purchases related to buying a new home, starting a
family, and beginning a career. At this stage in life the individual will borrow from the
future to support these expenditure needs. In mid-life however, these expenditure
patterns begin to level off and are supported or perhaps exceeded by increases in
income. At this stage the individual repays any past borrowings and begins to save for
her or his retirement. Upon retirement, consumption expenditure may begin to decline
however income usually declines dramatically. In this stage of life, the individual dis-
saves or lives off past savings until death.
C Friedman’s permanent income Hypothesis a model in which current
consumption was just a function of current income clearly was too simplistic. It could not
explain the fact that the long-run average propensity to consume seemed to be roughly
constant despite the marginal propensity to consume being much lower. Thus Milton
friedman 's permanent income hypothesis is one of the models which seeks to explain
this apparent contradiction.
According to the permanent income hypothesis, permanent consumption, CP, is
proportional to permanent income, YP. Permanent income is a subjective notion of likely
average future income. Permanent consumption is a similar notion of consumption.

D Hall’s Random Walk model Robert Hall was the first to derive the effects of
rational expectations for consumption. His theory states that if Milton Friedman’
permanent income hypothesis is correct, which in short says current income should be
viewed as the sum of permanent income and transitory income and that consumption
depends primarily on permanent income, and if consumers have rational expectations,
then any changes in consumption should be unpredictable, i.e. follow a random walk.
Hall’s thoughts were: According to the permanent-income hypothesis, consumers deal
with shifting income and try to smooth their consumption over time. At any given
moment, a consumer selects their consumption based on their current expectations of
their lifetime income. Throughout their life, consumers modify their consumption
because they receive new information that makes them adjust their expectations. For
example, a consumer receives an unexpected promotion at work and increases
consumption. Whereas a consumer that is unexpectedly fired or demoted will decrease
consumption. So changes in consumption reflect “surprises” about lifetime income. If
consumers are optimally using all available information, then they should be surprised
only by events that were completely unpredictable. Therefore, consumer’s changes in
consumption should be unpredictable as well