Topic 04 - Consumption

Topic 04 - Consumption - BUAD 350 Topic 04 Consumption and...

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BUAD 350 Topic 04 – Consumption and Saving
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Keywords Intertemporal choice The two-period model The life-cycle model Permanent income hypothesis Rational expectations
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Why are saving rates falling?
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Are Americans saving too little? “It's a bit soon to tell if American consumers made -- and are keeping -- New Year's resolutions to save more money this year. But they should.” Negative personal savings rate: What does it mean?, by Laura Bruce, Bankrate.com
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How de we analyze saving/consumption choices?
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How de we analyze saving/consumption choices?
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U.S. Savings Rate at Highest Point in 15 Years June 26, 2009, New York Times “Tax cuts from the stimulus package and increases in Social Security checks lifted personal incomes sharply in May, the government reported on Friday, but it appeared that many people were putting that money away instead of spending it.”
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Personal Saving Rate, 1947-2010 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 1947-I 1950-I 1953-I 1956-I 1959-I 1962-I 1965-I 1968-I 1971-I 1974-I 1977-I 1980-I 1983-I 1986-I 1989-I 1992-I 1995-I 1998-I 2001-I 2004-I 2007-I 2010-I Percent Pers Sav/GDP Inv/GDP Private Sav/GDP
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Intertemporal Choice Keynes hypothesized that consumption (and therefore saving, since saving = income - consumption) depends on the current level of income alone
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In reality, in choosing how much to consume versus save today, the household is making a tradeoff between the present and the future Irving Fisher formalized this tradeoff, and introduced the interest rate as an important determinant of consumption and saving
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This note was uploaded on 02/15/2011 for the course BUAD 350 at USC.

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Topic 04 - Consumption - BUAD 350 Topic 04 Consumption and...

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