Macro Open Hour Questions.docx

# Macro Open Hour Questions.docx - Questions Why is left of...

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Questions Why is left of 45 degree line where D>S. Where to get definitions? Core? The MPC from temp unanticipated changes in imcome is approx. equal to IR which is r/1+r thus k is approx. = 1 for temp income shock. Permemant income shock k>1. Temp changes rises consumption by r/1+r times by 1. Perm changes rises c by r/1+r multiplied by 1+r/r =1 (1) News of temp increase in income. If current income yt rose by 1 unit unexpectedly, c would rise by the extent to which this increases permemant income. As the rise in 1 unit will spead over the entire future, the PIH C function t thus c will rise very little (only by r/1+r multiplied by the rise in lifetime wealth). The MPC out of temp income is r/1+r (if r = 4%. MPC = 3.8% which implies a multiplier is barely >1). Why did MPC come from and why is it only r/1+r Whether a person wants to smooth consumption depends on p (rho) and the relationship between the IR on saving and borrowing (example on the last part?) Difference between IS/PIH/Keynesian? If disposable income is zero, the consumption function predicts consumption equal to c0. For this to be the case, households must have some savings and or they must be able to borrow. A more satisfactory model of consumption must therefore include forward-looking

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• Fall '14
• MartinCrippsandIanPreston
• Macroeconomics, Consumption function, PIH

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