Graduation Year

Fall 2012

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Cameron Shelton

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Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2012 Avantika Saisekar

Abstract

This paper focuses on the consumer expenditure habits in the years following the 2008 recession as compared to Milton Freidman’s Permanent Income Hypothesis. Panel data collected at the household level from the Consumer Expenditure Survey was used to analyze the change in consumption based on the change in income for the years 2009, 2010 and 2011. To achieve a greater understanding of expenditure patterns, this essay also analyzes the income elasticity of demand for elastic goods including expenditure on apparel, food eaten at restaurants, entertainment and transportation. With the use of panel and time series regressions we find that the Permanent Income Hypothesis holds true and consumers only marginally responded to a change in income in their consumption patterns. We hypothesize that the large spike in savings that was seen in May of 2008 resulted because of low consumer confidence, which in turn lead to a change in transitory consumption. Furthermore, we find that older adults spent more money on elastic goods than younger adults. This may be because older adults tend to have other assets that can financially support them in the case of a drastic change in income.

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