Lecture06 - Announcements Readings this week House, ch 6,...

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1 Announcements Readings this week • House, ch 6, 7, 8 • Mankiw, ch 3, 18 Problem sets • PS #3 due now • No PS this week – Instead, practice Midterm Ungraded , but strongly advised Consumption Function: • What determines Aggregate Consumption ( C )? Individual c depends on individual wealth and r. • Aggregate C should be determined by aggregate W . Consumption Function: (, ) CC W r + - Consumption: Increasing function of wealth ( W ) = financial assets + PDV labor income Decreasing function of real interest rate ( r )
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2 Total Savings: S = Y C S = Y C ( W , r ) • Savings Function” = S = S ( Y, W, r ) + - + Market for loanable funds r S ( Y , W , r ) S r * What determines interest rate? • Equilibrium • Supply of loanable funds (saving function) • Demand for loanable funds – Investment – Government – Foreign sector • Will endogenize investment shortly – Now take investment as exogenous
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3 YC I G  YT CIGT   () C SI GT  private saving = investment - govt saving G T   (, ,) ( ) SYW r I G T From identity to equilibrium condition Market for loanable funds r S ( Y , W , r ) S r * IG T
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4 Market for loanable funds r S ( Y , W , r ) S r * () IG T  r *’ Given income ,
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This note was uploaded on 12/31/2011 for the course ECON 402 taught by Professor House during the Fall '08 term at University of Michigan.

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Lecture06 - Announcements Readings this week House, ch 6,...

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