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2.3. Life Cycle Hypothesis F. Modigliani, A. Ando and R. Brumberg, A. Ando and R. Brumberg examined the consumption function using the Model of Fisher in a series of writing. ModiGliani revealed that the income has changed in a systematic way through the lives of people and the income of people can shift when it is lower than when it is high in life. This interpretation of consumer behavior is the basis of life cycle hypothesis (MANKIW, 2009: 529). The consumption function of Keynes, assuming that individual consumption behavior is connected to a period of income in the relevant period, the MODIGLiani’s life cycle hypothesis are trying to achieve the largest total benefit from all their lives of individuals, for this for quite long periods of consumption and savings.
22 The net value of today should not exceed the present value of the total income of the individual in question (Branson and Litvack, 1976: 202). The effort to keep individuals fixed their consumption for benefit maximization, will cause the individual in the opposite of revenue to protect the current consumption of the individual to protect the current consumption. In the periods that the revenue increases relatively, the borrowing will decrease and the existing payables will be reduced. Individuals have different income and design in different periods of their lives. Young individuals start the labor market with the relatively lower fee and their savings are low and increases with the middle age, and savings increases with the middle age and the income in the retirement period is started to be consumed (Froyen, 2002: 468). Graphics-1: Life Cycle Hypothesis Source: Thaicharoen. Ariyapruchya and chucherd (2004).
23 The above graphics-1 borrowing, savings and consumption reveals the relationship with age according to the life cycle hypothesis. According to the chart, borrowing in the early age periods is increased in a certain age level of borrowing is designed. On the other hand, consuming tends to be stable at all age level. The life cycle hypothesis is more compatible with short and long-term findings. In this hypothesis, the proportional increases between the current income and consumption of consumption are not envisaged in Keynes in the hypothesis. Conjunctive change in current income is not reflected in significant proportions to consumption expenditures. In the vhanner; A sudden splash occurring in income does not affect the consumption at the same rate, so the average consumption tendency decreases. In the same way, the average consumption tendency is increasing in the face of an income. The life cycle hypothesis foresee the average consumption tendency to remain constant unless the wealth revenues are changed in the available income. In addition, the Hypothesis Heritage Element is in an impressive position of consumption expenditures (Paya, 2002: 69). 2.4. Continuous income hypothesis Milton Friedman’s continuous income hypothesis in 1957 complement the MoDigliani’s life cycle hypothesis. This is, both of these hypotheses are set out of the idea that consumation should not only depend on the current income. However, unlike the life cycle hypothesis that emphasizes the income hypothesis during the life of a person’s life, it is noteworthy that people have random and temporary changes in years in years (MANKIW, 2009: 534).