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ECON2004Lecture04

ECON2004Lecture04 - What was missing from IS-LM Reading...

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ECON2004 Macro Term 1, Lecture 4: Consumption 1 Lecture 4: Consumption Reading. Core: Carlin and Soskice 7.1 Blanchard 16.1 Optional: Blanchard 16.1 “How much do expectations matter?” Advanced: Carlin and Soskice 7.1.5 Meghir, Costas (2004) "A Retrospective on Friedman's Theory of Permanent Income" . Economic Journal, Vol. 114, No. 496 ECON2004 Macro Term 1, Lecture 4: Consumption 2 What was missing from IS-LM? underlying relations are ad-hoc what about expectations? how do prices adjust?
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ECON2004 Macro Term 1, Lecture 4: Consumption 3 Some data Consumption as %age of GDP 0 10 20 30 40 50 60 70 80 90 ARGENTINA BANGLADESH BOTSWANA CHILE CHINA,P.R.: MAINLAND DENMARK GREECE JAPAN NORWAY SWEDEN THAILAND USA ECON2004 Macro Term 1, Lecture 4: Consumption 4 The Keynesian consumption function “The fundamental psychological law, upon which we are entitled to depend with great confidence both a priori from our knowledge of human nature and from the detailed facts of experience, is that men [sic] are disposed, as a rule and on average, to increase their consumption as their income increases, but not by as much as the increase in their income” (Keynes, General Theory) And from this is derived the multiplier
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ECON2004 Macro Term 1, Lecture 4: Consumption 5 Is current income the only determinant of consumption?
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