2 period model

Question 1

Inter temporal decisions

Answer 1

Decisions involving economic trade offs across periods of time

Question 2

consumption-saving decision

Answer 2

The decision by a consumer about how to split current income between current consumption and saving

Question 3

ricardian equivalence theorem

Answer 3

States that changes in the stream taxes faced by consumer that leave the present value of taxes unchanged have no effect on consumption , interest rates or welfare

Question 4

2 period model

Answer 4

an economic in which all decision makers (consumer and firms) have two period planing horizons, with the two typically representing the present and future

Question 5

real interest rate

Answer 5

the rate of return on saving in units of consumption

Question 6

consumption smoothing

Answer 6

the tendency of consumer to seek a consumption path over time that is smoother than income

Question 7

endowment point

Answer 7

the point on a consumer’s budget constrain where consumption is equal to disposable income in each period

Question 8

consumer’s budget constrain in the current period is: (formula)

Answer 8

c + s = y - t s :saving t: taxes c :consumption y: output

Question 9

credit market :

Answer 9

a place where the consumer can buy/sell assets (bonds)

Question 10

s > 0

Answer 10

lender buy a bond and earn a return “r”

Question 11

s < 0

Answer 11

borrower: sell a bond (get money from the sale of the bond , and pay interest on debt “r”

Question 12

Future period consumer BC:

Answer 12

c’ = y’ - t’ + s(1 + r) s’ : saving t’: futures taxes c’ : futures consumption y’: futures output s(1 + r): return on saving from current period