EC2102_Lecture 4.pdf - Macroeconomic Analysis I Topic 4...

Info icon This preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Macroeconomic Analysis I Topic 4 Consumption, Saving and Investment (Abel, Bernanke & Croushore: Chapter 4) 1
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Learning Objectives o Discuss the factors that affect consumption and saving decisions o Discuss the factors that affect the investment behavior of firms o Explain the factors affecting goods market equilibrium 2
Image of page 2
o The importance of consumption and saving Desired consumption: consumption amount desired by households Desired national saving: level of national saving when consumption is at its desired level: S d = Y C d G (4.1) 3 Consumption and Saving
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
o The consumption and saving decision of an individual Trade-off between current consumption and future consumption The price of 1 unit of current (this year’s) consumption is 1 + r units of future (next year’s) consumption, where r is the real interest rate Consumption-smoothing motive: the desire to have a relatively even pattern of consumption over time 4 Consumption and Saving
Image of page 4
o The consumption smoothing guides changes in consumption and saving behaviors when there are changes in current income, expected future income and wealth. Current Income One time increase in current income would increase current consumption With marginal propensity to consume (MPC) less than 1, consumer consumes some but not all of her extra income Unspent portion of the additional income will be saved, resulting in an increase in current savings 5 Consumption and Saving
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Consumption and Saving o Current consumption not only depends on current income, but also the income a person expects to earn in future. Expected Future Income If expected future income increases, consumption smoothing motive tends to cause an increase in current consumption With current income unchanged, an increase in current consumption is equivalent to a decrease in current savings 6
Image of page 6
o Another factor which affects consumption and saving is wealth. Wealth An increase in wealth provides more resources for consumption, resulting in a rise in current consumption With current income unchanged, an increase in current consumption is equivalent to a decrease in current savings 7 Consumption and Saving
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon