(Solution) - In the discussion of the life cycle hypothesis in the text -(2025 Original AI-Free Solution)

Paper Details

In the discussion of the life-cycle hypothesis in the text, income is assumed to be constant during the period before retirement. For most people, however, income grows over their lifetimes. How does this growth in income influence the lifetime pattern of consumption and wealth accumulation shown in Figure 17-12 under the following conditions?
a. Consumers can borrow, so their wealth can be negative.
b. Consumers face borrowing constraints that prevent their wealth from falling below zero.
Do you consider case (a) or case (b) to be more realistic? Why?