{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lec7 - Finance 101 Monetary Economics the Global Economy...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Finance 101: Monetary Economics & the Global Economy Lecture 7 Consumption and Savings II Prof. Hnatkovska Fall 2011
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
FNCE 101 - Hnatkovska - Lecture 7 2 Outline Interest rates and consumption Fiscal policy and consumption Ricardian equivalence
Background image of page 2
3 Readings ABC Chapter 4.1 ABC Appendix 4A FNCE 101 - Hnatkovska - Lecture 7
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Practice problems ABC chapter 4 Numerical question 8 4 FNCE 101 - Hnatkovska - Lecture 7
Background image of page 4
Nuanced PIH: Keynesian and PIH consumers Aesop's fable about grasshoppers and ants The ants are forward looking, like PIH theory suggests – they know retirement or bad times are coming and prepare for it. Grasshoppers are Keynesian – consume their current income and save very little Over 20% of households do not own a checking/saving account (over 50% of African American Households); (40% have less than $5k in liquid assets). FNCE 101 - Hnatkovska - Lecture 7
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Nuanced PIH: Home Production We measure consumption expenditures, not consumption. When value of time is low (unemployment or retirement), individuals can take action to reduce their expenditure, but keep consumption unchanged: Clip coupons Search for bargains across stores Make your meal at home instead of buying it at a cafeteria. FNCE 101 - Hnatkovska - Lecture 7
Background image of page 6
FNCE 101 - Hnatkovska - Lecture 7 7 Review of consumption-smoothing model Consumer’s problem max c,cf {u(c) + β *u(c f )} subject to c f = (a + y - c)(1+r) + y f max c {u(c) + β *u[ ( a + y - c )(1+ r ) + y f ]} Solution Desired consumption: c* = c(y,y f ,a,r) Desired savings: s* = y – c* = s(y,y f ,a,r) MRS c u c u r MRT c u r c u f f = - = + - = = + - ) ( ) ( ) 1 ( 0 ) ( ) 1 ( ) ( β β
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Effect of changes in interest rate So far we have focused at changes in income and wealth. Now let’s analyze the effects of changes in prices. Recall (1+r) is the price of today’s consumption relative to tomorrow's consumption. You forgo (1+r) dollars of future consumption to consume 1 dollar today.
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}