Lecture_16_2010_M - Intermediate Macroeconomics Bruce...

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Unformatted text preview: Intermediate Macroeconomics Bruce Preston March 24, 2010 Today Microfoundations: Detailes of the IS curve Theory of Consumption continued Theory of Investment So far ... Cons dered he role of resources for consump on aloca on Wha s m s ng? Marke s for lend ng and borow ng Governed by key pr ce: n eres ra es Eec of Changes n Real In eres Ra es Increase n r , he pr ce of curen consump on n erms of fu ure consump on, has wo eec s Subs u on eec : ncreased reward o sav ng hrough h gher fu ure consump- on Income eec : " r = ) g ven amoun of S produces grea er weal h = ) C " Wh ch Eec Dom na es? Agrega e eec amb guous n heory: ncome eec s d eren for lenders and borowers Lenders: subs u on and ncome eec opera e n d eren d rec on. he former ends o ncrease C , he la er decrease C orowers: subs u on and ncome eec opera e n he same d rec on. " r = ) cos of repay ng loans s h gher = ) " S = ) # C Emp r cal ev dence: subs u on eec weakly dom na es F scal Pol cy Changes n scal pol cy aec s curen and fu ure d sposable ncome Aec s presen value of l fe- me resources: weal h Aec s consump on Cons der: $10 m l on " G If pa d by a $10m " T = )# Y d = Y T = )# C Fal n C les han ncrease n T- why? If pa d by borow ng = ) fu ure T mus r se. he ncrease n fu ure axes mus be exac ly he same n presen d scoun ed value. Hence: C fals by he same amoun Na onal sav ngs fals s nce: S = Y C G and G ncreases by more han he fal n C R card an Equ valence Curen budge dec has o be nanced by fu ure axes Curen ax cu mpl es fu ure ax ncreases if governmen spen ing plans remain unchange L fe- me weal h s he same Consump on s he same Pr va e sav ng oday ( Y C T ) ncreases o pay fu ure ax obl ga ons and exac ly o-se s curen ax cu on consump on Sumary of Sav ngs Dec s ons Household sav ngs dec s on wel cap ured by S d = S ( Y; W ; r ) or C d = C ( Y; W ; r ) Impl es sav ngs curve upward slop ng Sumary of Sav ngs Dec s ons I Fac ors ha cause S d o r se Increase n curen Y Increase n r axes (bu remember R card an equ valence) Decrease n expec ed fu ure Y Decrease n weal h and governmen purchases General z ng he as c Model yp caly observe Income grow h over he l fe-cycle Non-zero real n eres ra es We now ex end he l fe-cycle model o handle hese compl ca ons he Value of Fu ure Income Wha s he value of $1 payable n one years me? If he real n eres ra e s r hen he value v s v = 1 1 + r Equ valen ly, nves ng a quan y v oday y elds v (1 + r ) = 1 n one years me Presen D scoun ed Values More generaly, we can de erm ne he value of $1 n n years me as v = 1 (1 + r ) n v s he quan y ha would have o be pu as de oday o acumula e $1 n...
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This note was uploaded on 02/27/2011 for the course ECONOMICS 201 taught by Professor P during the Spring '11 term at Columbia College.

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Lecture_16_2010_M - Intermediate Macroeconomics Bruce...

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