Consumption, Fiscal Policy, and Trade Flashcards
What is the main point of the neoclassical consumption model?
Individuals choose consumption levels to maximise lifetime utility.
What two time periods exist in the neoclassical consumption model?
- Today
- The future.
More consumption gives more utility at constant marginal returns. True or false?
False, diminishing marginal utility.
What does the parameter B mean in the consumption utility function?
How much weight you place on the future - essentially, patience.
Does the Euler equation imply consumers should prefer present or future consumption?
Neither - they should be indifferent.
If income increases, current consumption will increase a bit but not the full amount - this is called marginal ________ to ______.
propensity to consume.
Define the Ricardian equivalence.
Consumption depends on the PDV of future taxes, with their timing having no effect.
For individuals with no access to wealth/credit, consumption can be no greater than income. True or false?
True.
Under borrowing constraints, marginal propensity to consume is unity (1:1). True or false?
True.
If taxes are greater than spending, we have a budget deficit. True or false?
False.
The uses of government funds are G, Tr, and iB. What are these?
G = goods and services
Tr = welfare
iB= interest on bonds
The sources of government funds are T, delta B, and delta M. What are these?
T = Taxes
Delta B = Selling bonds
Delta M = Printing new money
What is the primary deficit?
G - T
What is the total deficit?
G - T + iB
The theory that government deficits soak up private savings in an economy is called:
Crowding out.
