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Macroeconomic Analysis 2003

Macroeconomic Analysis 2003. Consumption. Contents. Importance of Consumer Confidence Co-movement of Consumption and GDP Five Main Theories of Consumption Reconciliation of Absolute and Permanent Hypothesis Calculation of Life Cycle Income. Consumption and GDP Fluctuate Together.

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Macroeconomic Analysis 2003

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  1. Macroeconomic Analysis 2003 Consumption Lecture 11

  2. Contents • Importance of Consumer Confidence • Co-movement of Consumption and GDP • Five Main Theories of Consumption • Reconciliation of Absolute and Permanent Hypothesis • Calculation of Life Cycle Income Lecture 11

  3. Consumption and GDP Fluctuate Together Lecture 11

  4. Lecture 11

  5. Theories of consumption Lecture 11

  6. Keynesian Absolute Income Hypothesis APC declines with income C APC >MPC for low Y APC  MPC for high Y 450 Y Lecture 11

  7. Permanent Income Hypothesis of Consumption APC is constant in the long run C Consumption relates to permanent Saving or borrowing for transitory Y YP or W Lecture 11

  8. Reconciliation Between Keynesian and Kuznet’s Hypothesis LCF SCF3 C SCF2 SCF1 SCF1-SCF3 are short run consumption functions, and LCF is the long run consumption function. APC varies with income in the short run but it is constant in the long run. Y Lecture 11

  9. How can short run APC vary but long run APC be constant? Lecture 11

  10. Life Cycle Model of Consumption and Saving Modigiani-Ando-Brumberg life cycle hypothesis Saving C,S,Y C-Smoothing Borrowing Dissaving Old Young Adult Lecture 11 Smooth consumption and erratic income over life

  11. Random Walk Theory of Consumption Sometimes people consume more than the trend . . . . . . +ve . Shock or noise C . . . . . . -ve . Sometimes people consume less than the trend Life Lecture 11

  12. Micro-foundation Model of Consumption Two Period Model of Consumption and Saving C2 w2 c2 Borrowing c1 w1 C1 Lecture 11

  13. First Order Conditions of Optimisation Lecture 11

  14. Main Results of the Two Period Model of Consumption Lecture 11

  15. Optimal Saving and Consumption in Two Period Model Lecture 11

  16. Consumption Choices with the Borrowing Constraints Endowment and Consumption point w2 A B w1 Lecture 11

  17. MPC Out of Transient and Permanent Income Lecture 11

  18. How to Calculate Life Cycle Consumption? Lecture 11

  19. Example of Life Cycle Income and Consumption Lecture 11

  20. Exercises • Role of consumer confidence in the economy • Absolute income, permanent income and Life cycle income hypothesis • Intertemporal model of consumption • Consumption smoothing and saving for retirement problems • Impact of income tax on consumption • Consumption under borrowing constraint • Life cycle income-consumption and saving scenarios Lecture 11

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