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Unformatted text preview: !"#$%&' )*++ %&,&- ./#0122#/ 31*4/56 .**+ 78,98%&,& 7:&& ;< '1"4=/1 7: >#?2=@A45#? *?B 2*C5?D >#@A*/*45C1 E4*45"2 ,8F Lecture 9 "#$ %&'()*+,-&'./01-'2 %#&-3$ %&*+040,-1$ /,0,-3( Last time consumption saving choice ( Chapter 4.1 and 4.Appendix ) Today finish consumption saving choice ( Chapter 4.1 and 4.Appendix ) Next time fiscal policy and consumption ( Chapter 4.1 and 4.Appendix ) %&*+040,-1$ (,0,-3(5 6&7 8&$( ,#$ &+,-*09 3#&-3$ &: 3&'()*+,-&' 0'8 (01-'2 8$+$'8 &' +040*$,$4(; two kinds of changes in the budget set: size and slope FKDQJHV WKDW DIIHFW RQO\ WKH VL]H RI WKH EXGJHW VHW EXW QRW LWV VORSH DUH FKDQJHV LQ these are pure income effects changes that affect the slope are changes in r we expect an income and a substitution effect to result from this definition of saving vs. lending private saving is defined as net lending is the asset position of the household at the end of the current period , , , , f f f y n t y n t a y y p p pv t s y n t c y c net lending a y c !"#$%&' )*++ %&,&- ./#0122#/ 31*4/56 .**+ 78,98%&,& 7:&& ;< '1"4=/1 7: >#?2=@A45#? *?B 2*C5?D >#@A*/*45C1 E4*45"2 %8F "#$ $::$3, &: 3#0'2$( -' -'3&*$ 0'8 7$09,# <=> increase in current income budget set is shifted out both increase because they are normal goods also increases two ways to see this consumption smoothing means that not all of the extra income will be consumed today. Some will be saved. Since future consumption increases, but future income does not, the source of the extra consumption is extra saving. and f c c pv t s c c f D2 C1 2 y a C2 y f 1 y a D1 1 c 1 f c 2 c 2 f c "#$ *042-'09 +4&+$'(-,? ,& 3&'()*$ <@A%> Definition If income increases by one unit, consumption increases, but by less than one unit. The fraction of additional income spent on additional current consumption is called the marginal prop e n s ity to c on s um e ( MPC) . With notation Consumption smoothing implies that We can also use the MPC to derive the effect of an income change on private saving and future consumption...
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This note was uploaded on 10/25/2010 for the course ECO 320L taught by Professor Kendrick during the Fall '10 term at University of Texas at Austin.
- Fall '10