Econ110BW11 - Lec9 A - GR_ol

Econ110BW11 - Lec9 A - GR_ol - Macroeconomics B Econ 110B...

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Macroeconomics B Econ 110B–Winter 2011 Prof. Giacomo Rondina Lecture 9
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Announcements 1. Solutions to Problem Set 3(a) Posted. 2. Problem Set 3(b) will be posted later today. . lutions to PS 3(b) will be posted on Monday. 3. Solutions to PS 3(b) will be posted on Monday. 2 Financial Markets and Expectations (Ch. 15)
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Plan for Lecture 9 Borrowing Constraint and Consumption Expectations and Investment e q eory The q Theory The New IS 3 Financial Markets and Expectations (Ch. 15)
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Expectations and Consumption The very foresighted consumer C W W = Total Wealth = ( ) tt CC = t Non Human Wealth + Human Wealth Financial Wealth : Value of Stocks alue of Bonds Housing Wealth : Value of House inus the Mortgage Present value of expected after tax labor income Value of Bonds Value of savings and checking accounts minus the Mortgage still due. 4 Expectations, Consumption and Investment (Ch. 16)
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Expectations and Consumption onsumption Decisions Consumption Decisions Financial Wealth: Stocks and Bonds $0 Housing Wealth: House $0 Other Wealth: Corvette $4,000 College Loan $4,000 Non human Wealth $0 Human Wealth 20 years old Salary first job in 3 years $50,000 ( Y Lt ) verage year increase 3% Average year increase Retirement at age 60 Average taxes paid: 25% of salary Total Human Wealth $2,593,500 Total Wealth $2,593,500 5 Expectations, Consumption and Investment (Ch. 16)
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Expectations and Consumption The very foresighted consumer Permanent Income Theory (Milton Friedman) Life Cycle Theory (Franco Modigliani) N: remaining lifetime 1 tt CW N = × $44,716 $2,593,500 / 58 = 6 Expectations, Consumption and Investment (Ch. 16)
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Expectations and Consumption A more realistic description of consumption , tt t t CC W Y T ++ ⎛⎞ =− ⎜⎟ ⎝⎠ A. Suppose Y e t+1 so that W t by 10% C t by Δ C A >0 . ppose at y 0 y e gent orrowing nstrained crease ot nly creases s B. Suppose Y t so that W t by 10 % C t by Δ C B >0 If the agent is borrowing constrained, increase in Y t not only increases W t (as thein c r e a sein Y e t+1 does) but it also relaxes the borrowing constraint. Therefore Δ C B > Δ C A 7 Expectations, Consumption and Investment (Ch. 16)
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Expectations and Consumption A more realistic description of consumption , tt t t CC W Y T ++ ⎛⎞ =− ⎜⎟ ⎝⎠ “New Theory” of Consumption 8 Expectations, Consumption and Investment (Ch. 16)
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Expectations and Economic Activity 1. Expectations and Consumption . pectations and Investment 2. Expectations and Investment pectations and the IS 3. Expectations and the IS pectations and Fiscal and Monetary Policies 4. Expectations and Fiscal and Monetary Policies 9 Expectations, Consumption and Investment (Ch. 16)
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Econ110BW11 - Lec9 A - GR_ol - Macroeconomics B Econ 110B...

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