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Macro > Consumption And Saving > Flashcards

Consumption And Saving Flashcards

1
Q

National level of desired consumption

A

Is the aggregate quantity of goods and services that households optimally choose to consume, given income and other factors

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2
Q

Desire national saving is the…

A

Level of aggregate saving when consumption is optimal

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3
Q

Desire national saving=

A

Y - C - G

Income minus consumption - gov spending

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4
Q

Budget constraint for current period

A

Future assets= income - consumption + assets

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5
Q

Budget constraint in future period =

A

Future consumption = future income
+ (1+real interest rate)*futture asset

Cf= yf + (1+r)*af

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6
Q

Saving =

A

Income - consumption

Y-C

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7
Q

When saving what occurs…

A

Saving>0 as income>consumption and

future asset >0

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8
Q

When dissaving

A

Consumption is greater than income

Saving <0

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9
Q

The individual is a borrower if

A

Future asset < 0

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10
Q

Individual is a lender if

A

future assets > 0

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11
Q

When future assets > 0 then a person is a lender

What can saving be

A

S>0

S<0

S=0

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12
Q

Is someone is a borrower then what is saving

A

Saving<0

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13
Q

What is the trade off

A

Between current consumption and future consumption

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14
Q

What determines the price of current and future consumption

A

Real interest rate

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15
Q

Consolidated budget constraint

Combined the two period budget constraints

A

c + cf/1+r = y + a +yf/1+r

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16
Q

What is the left hand side and the right side mean of the consolidated budget constraint

A

LHS = present value of lifetime consumption

RHS = present value of lifetime resources

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17
Q

Inter temporal budget constraint properties

A

Cf = vertical axis

C = horizontal axis

Slope = -(1+r

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18
Q

What happens to graph when interest rate is higher

A

Steeper budget constraint

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19
Q

Household optimisation problem

A

Max U= u(c) + Bu(cf)

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20
Q

What is B in the optimisation problem

A

Captures the extent to which consumers are patient -
If consumer is very impatient- she places less weight on future utility thus B is lower

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21
Q

What is it when B = 1

A

Consumer treats utility received today and in future equally

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22
Q

What is the optimality condition

A

u’(c) = B(1+r)u’(cf)

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23
Q

What does optimality condition mean

A

Individual is indifferent between consuming one more item today or saving it and consuming it in the future

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24
Q

When u’(c) > B(1+r)u’(cf)

A

Marginal utility of consumption today is higher than utility gained from consuming in the future

Thus consumer should increase current consumption

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25
Q

FILL THIS CARD IN SLIDE 18

A
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26
Q

Is there is a low B what is consumption growth like

A

Growth is lower

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27
Q

What is consumption growth when high real interest rate

A

High consumption growth

28
Q

consumption smoothing motive

A

Desire to have. Relatively even pattern of consumption

29
Q

What does an increase in income do to PVLR and why

A

Raises PVLR because the consumption smoothing motive both current and future consumption are expected to increase

30
Q

Marginal propensity to consume (MPC)

A

The fraction of additional current or future income that the individual allocates to current or future consumption

Assume 0<MPC<1

31
Q

Aggregate level

A

When aggregate output (Y) rises, aggregate consumption (C) rises but by less than Y so desired national saving also increases

32
Q

What does temporary increase in income do…

A

Increase current income but future income is constant

33
Q

Permanent increase in income…

A

Increase current and future income

34
Q

Why does saving increase when income increases

A

Bc increase in consumption is less than the increase in income

35
Q

What does increase in future income do to pvlr and consumption

A

Increase PVLR, consumption and future consumption

36
Q

What does increase in future income do to savings and why

A

Decrease savings as current income is constant but consumption increases

37
Q

What does an increase in real interest rate effec

A

Current consumption becomes more expensive so gives rise to substitution effect

38
Q

Sub effect

A

Current consumption falls but savings and future consumption rises

39
Q

Income effect for lender with respect to r

A

Increase in r = increased wealth thus an increase in c and cf but falls in savings

40
Q

Income effect for borrower with respect to r

A

Rise in r = fall in wealth so fall in c and cf but rise in savings

41
Q

Total effect of r on lender and borrower

A

Lender = unknown effect on savings - depends which effect is dominant

Borrower = savings increase

42
Q

How do we know if graph is a lenders graph

A

E0 is to the left of D

43
Q

How do we know graph is borrowers graph

A

E0 is to the right of D

44
Q

Expected real after tax interest rate =

A

(1-t)*i-expected inflation

I = nominal interest rate

45
Q

Assumption about fiscal policy

A

Does not affect Aggregate supply

46
Q

Fiscal policy to do with

A

GOVERNMENT SPENDING AND TAXES

47
Q

Disposable income =

A

Income - taxes

48
Q

Change in disposable income affects what which then affects what

A

Disposable income effects consumption which then causes change in savings

49
Q

National saving =

A

Sad= Y - Cd - G

50
Q

Fall in $1 of national consumption does what to savings

A

Increase of $1 to nation savings

51
Q

What increases to reduce national saving

A

Government spending

52
Q

Two ways government can finance spending

A

Increasing taxes or borrowing

53
Q

For financed by taxing what is change in G =

A

Change in taxes

54
Q

What does increase in government spending do via tax

A

Increase taxing - so current disposable income decreases so current and future consumption decreases

55
Q

Change in disposable income is =

A
  • the change in taxes
56
Q

Change in national consumption =

A

-MPC * change in G

57
Q

Financing spending by borrowing does what to disposable income

A

Decrease future disposable income so future consumption also decreases

58
Q

For borrowering what is change of government spending =

A

Change in future taxes q

59
Q

What does a temporary increase in G do

A

Reduce aggregate consumption and aggregate saving

60
Q

When government spending in creases = saving decreases

But decrease consumption increases savings

Which on dominates

A

Increase gov spending causing savings to decrease

61
Q

Lump sum tax

A

Each tax payer pays the Same mount of tax

62
Q

What does reducing tax do

A

Increase disposable income and increase consumption

63
Q

For decreasing tax- what is the incrase in consumption done by

A

MC * change in disposable income

64
Q

If governments does not increase spending and tax is reduced then gov must need to borrow- what happens then

A

Future taxes increase so future Yd decreases so current consumption falls by MPC * chnage in future disposable income

65
Q

What is the effect on PVLR when gov keeps spending constant but reduces taxes

A

Increase current disposable income but decrease in future disposable income so PVLR is unknown as it depends which dominates

66
Q

Ricardian equivalence proposition

A

Idea that tax cuts do not effect consumption and do not affect national saving - as if gov spending stays the same, a cut in taxes affects the time the tax is collected but no the ultimate burden of the tax

67
Q

What increases PVLR more, permanent or temporary increase in income

A

Permanent

Macro (5 decks)

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