Week 11 Notes Econ 322
Week 11 Notes Econ 322 Econ 322
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This 3 page Class Notes was uploaded by Tulsi on Thursday March 31, 2016. The Class Notes belongs to Econ 322 at University of South Carolina taught by Hauk in Spring 2016. Since its upload, it has received 10 views. For similar materials see Intermediate Macroeconomics in Economcs at University of South Carolina.
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Date Created: 03/31/16
Week 11 Thursday, March 31, 22:56 PM Consumption Keynesian Model Y = C + I + G C = 0 + c(Y-T) MPC = C∆ ∆ = c 0<c<1 (marginal propensity to consume) APC (average propensity to consume) = C/Y = c 0Y + c If Y increases, APC increases If Y decreases, APC decreases C2 Secular Stagnation Hypothesis If Y increases a lot, APC will fall a lot Y2 + (1+r) Y1 Slope = Indifference curve Intertemporal Consumption Function Y2 -(1+r) -people live for 2 periods Intertemporal budget constraint -people can save and borrow across periods -Income in period 1 is Y1, income in period 2 is Y2 -Maximize utility across both periods subject to a budget constraint C1 -divide consumption across 2 periods Y1 Y1 + Y2/(1+r) (1+r)PV = FV PV = FV/(1+r) Borrow = .5/(1+r) -give up X amount of consumption today to get X + interest in the next period C2 am. -If Y1 increases: -If Y2 increases: a. B -C1, C2 increases -C1 ,C2 increases Y2 -know you will have more money in the future…so save less today and consume more today as well C1 Y1 C2 Saving in Period 1 • B -if r increases -budget constraint is steeper Y2 A -rotates around point (Y1, Y2) If person is Saving in Period 1: -c2 increases, c1 is ambiguous negligent change -c1: substitution effect causes decrease and income effect causes C1 Y1 increase -therefore, overall change in c1 is ambiguous Week 11 Notes Page 1 If person is Saving in Period 1: -c2 increases, c1 is ambiguous negligent change C1 -c1: substitution effect causes decrease and income effect causes increase Y1 -therefore, overall change in c1 is ambiguous C2 Borrowing in Period 1 If person is Borrowing in Period 1 -c1 decreases -c2 ambiguous Y2 ! • Bad. A C1 Y1 Modigliani Life-Cycle Consumption -person expected to live for T years -person expected to retire in R years -R<T -Earn an income of Y while working -W is accumulated wealth -Wants to smooth consumption over rest of life -C = * W + * Y -MPC = R/T (marginal propensity to consume) -0<MPC<1 --> 0<R/T<1 Aggregate consumption = α*W + β*Y α= average of 1/T β= average of R/T APC = C/Y = α*W/Y + β (Average propensity to consume) Milton Friedman Permanent Income Hypothesis -Y = Y + YT -Actual current income = permanent income + transitory income -permanent income: fixed salary -transitory income: income that you can't depend on (like a bonus) P -C = α*Y -APC = α* YP Y -MPC = c∆ ∆ = ? Could be zero -Government spending multiplier: -if MPC is 0….fiscal policy will not do much Robert Hall: "Random Walk" -combine Permanent Income with Rational Expectations -only unexpected events will affect consumption Week 11 Notes Page 2 David Laibson -Behavioral Economics -"Pull of Instant Gratification" -Consumption isnt always rational and is highly influenced by psychological factors SUMMARY TABLE Function C = MPC ( ∆ ∆y) APC (c/y) Keynesian c 0 cY 0<c<1 c0/Y + c Modigliani α*W + β*Y 0<β<1 α*W/Y + β P P Friedman α*Y ? Could be 0 α* Y Y Week 11 Notes Page 3
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