Intermediate Macroeconomics 2 Lecture 172 1 8 765
Intermediate Macroeconomics Lecture 17
Microeconomics behind Macroeconomics 12 ● Consumption 9 3 ● Investment 765 ● Money s and d ● Advances in business cycle model
Microeconomics behind Macroeconomics ⚫Consumption ⚫Investment ⚫Money S and D ⚫Advances in business cycle model
Consumption 12 ■ Keynes& C function 9 3 a Fisher intertemporal choice 765 a Life-cycle hypothesis a Permanent hypothesis a Random-walk hypothesis Pull of instant gratification
Consumption ◼ Keynes & C function ◼ Fisher & intertemporal choice ◼ Life-cycle hypothesis ◼ Permanent hypothesis ◼ Random-walk hypothesis ◼ Pull of instant gratification
Keynes consumption function 12 C=C+cY 9 3 o Marginal propensity to consume(0<C<1) 765 marginal consumption/marginal income Average propensity to consume (as YT) total consumption/total income 3 Interest does not affect consumption
Keynes & consumption function ① Marginal propensity to consume (0<c<1) marginal consumption/marginal income ② Average propensity to consume (↓as Y↑) total consumption/total income ③ Interest does not affect consumption C = C+ c Y −
Keynes consumption function 12 C=C+C·Y 9 3 765 MPC APC
Keynes & consumption function Y C C = C+ c Y − APC MPC 1 1
Keynes consumption function a dire prediction 12 9 3 as Y grew, households would consume 765 a smaller and smaller fraction of y save more and more. There might not be enough profitable investment projects to absorb s
Keynes & consumption function ◼ A dire prediction: as Y grew, households would consume a smaller and smaller fraction of Y & save more and more. There might not be enough profitable investment projects to absorb S
Keynes consumption function 12 f so, the low c would lead to an 9 3 inadequate d for g&s, resulting in 765 a depression once the wartime d for the government ceased (secular stagnation long depression of indefinite duration)
Keynes & consumption function If so, the low C would lead to an inadequate D for g&s, resulting in a depression once the wartime D for the government ceased. (secular stagnation: long depression of indefinite duration)
Keynes& consumption function 12 a Simon Kuznets 9 3 765 Constructed aggregate data on C and y from 1869-1940s Although Y increased dramatically APC Was stable from decade to decade
Keynes & consumption function ◼ Simon Kuznets Constructed aggregate data on C and Y from 1869-1940s Although Y increased dramatically, APC was stable from decade to decade
Keynes& consumption function 12 ■ The consumption puzzle 9 3 765 Household and sr data(ok) LR (APC is constant) 1950s, Modigliani friedman
Keynes & consumption function ◼ The consumption puzzle Household and SR data (OK) LR (APC is constant) 1950s, Modigliani & Friedman
Fisher intertemporal choice intertemporal choice 12 765rU 9 C2=Y2+(1+r)S1 2=Y2+(1+r)(X1-C1) (1+r)C1+C2=(1+r)X1+Y2 1+r
Fisher & intertemporal choice intertemporal choice 1 Y1 C1 S = − 2 2 1 C =Y +(1+ r)S (1 )( ) 2 2 Y1 C1 C =Y + + r − 1 2 1 2 (1+r)C +C = (1+r)Y +Y r Y Y r C C + = + + + 1 1 2 1 2 1
