Professional Documents
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MACROECONOMICS
N. Gregory Mankiw
Fall 2014
PowerPoint Slides by Ron Cronovich
®
update
© 2015 Worth Publishers, all rights reserved
IN THIS CHAPTER, WE WILL LEARN:
2
Keynes’s conjectures
C C cY
c c = MPC
= slope of the
1
consumption
C function
Y
CHAPTER 16 Understanding Consumer Behavior 4
The Keynesian consumption function
C C cY
C C
APC c
Y Y
slope = APC
Y
CHAPTER 16 Understanding Consumer Behavior 5
Early empirical successes:
Results from early studies
Households with higher incomes:
consume more, so MPC > 0
save more, so MPC < 1
save a larger fraction of their income,
so APC i as Y h
Very strong correlation between income and
consumption: income seemed to be the main
determinant of consumption
Consumption function
C
from long time-series
data (constant APC )
Consumption function
from cross-sectional
household data
(falling APC )
Y
CHAPTER 16 Understanding Consumer Behavior 8
Irving Fisher and Intertemporal Choice
Rearrange terms:
(1 r ) C 1 C 2 Y 2 (1 r )Y 1
C2 Y2
C1 Y1
1r 1r
C2
C2 Y2
C1 Y1
1r 1r
B
(1 r )Y1 Y 2
Consump =
Saving income in
The budget both periods
constraint shows A
all combinations Y2
of C1 and C2 that Borrowing
just exhaust the C
consumer’s C1
Y1
resources.
Y1 Y 2 (1 r )
CHAPTER 16 Understanding Consumer Behavior 13
The intertemporal budget constraint
C2
C2 Y2
C1 Y1
1r 1r
The slope of
the budget
line equals 1
-(1+r ) (1+r )
Y2
C1
Y1
IC1
C1
C2 The slope of
Marginal rate of an indifference
substitution (MRS ): curve at any
the amount of C2 point equals
the consumer the MRS
would be willing to 1 at that point.
MRS
substitute for
one unit of C1.
IC1
C1
C2
The optimal (C1,C2)
At the optimal point,
is where the MRS = 1+r
budget line
just touches
the highest
indifference curve. O
C1
C2 An increase
Results:
Provided they are
in Y1 or Y2
both normal goods,
shifts the
C1 and C2 both
budget line
increase,
outward.
…whether the
income increase
occurs in period 1
or period 2.
C1
Keynes:
Current consumption depends only on
current income.
Fisher:
Current consumption depends only on
the present value of lifetime income.
The timing of income is irrelevant
because the consumer can borrow or lend
between periods.
A
Y2
Y1 C1
C2
The budget
line with no
borrowing
constraints
Y2
Y1 C1
C2
The borrowing
constraint takes
the form: The budget
C1 ≤ Y1 line with a
borrowing
Y2 constraint
Y1 C1
Y1 C1
Y1 C1
LCH implies
that saving Wealth
varies
systematically
over a Income
person’s
Saving
lifetime.
Consumption Dissaving
Retirement End
begins of life
CHAPTER 16 Understanding Consumer Behavior 31
The Permanent Income Hypothesis
43
CHAPTER SUMMARY
44
CHAPTER SUMMARY
45
CHAPTER SUMMARY
46
CHAPTER SUMMARY
47
CHAPTER SUMMARY
48