What is Random walk model of consumption on expectation?

Answer 1

The Random Walk Model of consumption states that consumption levels fluctuate randomly around a long-term trend or average level of consumption. In this model, individuals make consumption decisions based on their expectations of future income, which may be uncertain or unpredictable.

The key assumption of this model is that individuals have rational expectations and use all available information to forecast their future income. This implies that consumers adjust their consumption levels in response to changes in their expectations of future income, leading to fluctuations in consumption over time.

Overall, the Random Walk Model suggests that consumption levels follow a random pattern, with no clear trend or pattern in the fluctuations observed. This model has been used to study how individuals make consumption decisions in the face of uncertainty and to analyze the effects of changes in income expectations on consumption behavior.