SLIDE 5 - CONSUMPTION-SAVINGS FRAMEWORK FEBRUARY 7, 2011...

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1 C ONSUMPTION- S AVINGS F RAMEWORK F EBRUARY 7, 2011 February 7, 2011 2 B ASICS Introduction ± Consumption-Savings Framework – provides foundation for ± Goods-market demand function (again…but w/different interpretation) ± Capital-market supply function ± An application of basic consumer theory… ± …we will put a macro interpretation on it ± Two time periods ± Important: all of our analysis will be conducted from the perspective of the very beginning of period 1… ± …so a “future” (period 2) for which to save ± Dynamic models are the staple of modern macroeconomic theory ± An explicit accounting of time ± Two periods are sufficient to illustrate the basic principles ± Soon will extend to infinite number of periods (Chapter 8)
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2 February 7, 2011 3 B ASICS Introduction ± Timeline of events ± Notation ± ! 1 :c o n s u m p t i o n i n p e r i o d 1 ± ! 2 o n s u m p t i o n i n p e r i o d 2 ± " 1 :n o m i n a l p r i c e o f c o n s u m p t i o n i n p e r i o d 1 ± " 2 o m i n a l p r i c e o f c o n s u m p t i o n i n p e r i o d 2 ± # 1 o m i n a l i n c o m e i n p e r i o d 1 ( f a l l s f r o m t h e s k y ) ± # 2 o m i n a l i n c o m e i n p e r i o d 2 ( f a l l s f r o m t h e s k y ) February 7, 2011 4 B ASICS ± Timeline of events ± Notation ± ! 1 o n s u m p t i o n i n p e r i o d 1 ± ! 2 o n s u m p t i o n i n p e r i o d 2 ± " 1 o m i n a l p r i c e o f c o n s u m p t i o n i n p e r i o d 1 ± " 2 o m i n a l p r i c e o f c o n s u m p t i o n i n p e r i o d 2 ± # 1 o m i n a l i n c o m e i n p e r i o d 1 ( f a l l s f r o m t h e s k y ) ± # 2 o m i n a l i n c o m e i n p e r i o d 2 ( f a l l s f r o m t h e s k y ) ± $ 0 o m i n a l w e a l t h a t t h e b e g i n n i n g o f p e r i o d 1 / e n d o f p e r i o d 0 ± $ 1 o m i n a l w e a l t h a t t h e b e g i n n i n g o f p e r i o d 2 / e n d o f p e r i o d 1 ± $ 2 o m i n a l w e a l t h a t t h e b e g i n n i n g o f p e r i o d 3 / e n d o f p e r i o d 2 ± % o m i n a l i n t e r e s t r a t e b e t w e e n p e r i o d s
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SLIDE 5 - CONSUMPTION-SAVINGS FRAMEWORK FEBRUARY 7, 2011...

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