L1-3 Consumption

Question 1

Draw Keynes consumption function
Slope?

Answer 1

Question 2

Long run consumption function APC?
Short run consumption function APC?

Answer 2

Question 3

Keynes consumption theory & empirical studies

Answer 3

MPC between 0-1
APC falls as income rises
current income main determinant of current consumption
Empiricial studies - short time series confirmed Keynes conjectures
Long time series data APC does not fall as income rises

Question 4

Irving fisher and intertemporal choice

Answer 4

Consumer is forward looking & chooses consumption for present and future to maximise lifetime satisfaction
Consumers choices subject to inter temporal budget constraint, measure of total resources available for present and future consumption
Current consumption depends on lifetime income and people smooth consumption

Question 5

Answer 5

Question 6

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Question 7

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Question 8

Question 9

Answer 9

Question 10

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Question 11

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Question 12

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Question 13

Question 14

Question 15

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Question 16

Answer 16

Question 17

Life cycle hypothesis

Answer 17

income varies systematically over the phase of a consumers life cycle and savings allow smooth consumption

Question 18

Answer 18

Question 19

Permanent income hypothesis

Answer 19

Question 20

Question 21

PIH vs LCH

Answer 21

Both: people try to smooth consumption due to changes in income
LCH: current income changes systematically as people move through life cycle
PIH: current income subject to random transitory fluctuations

Question 22

Random walk hypothesis

Answer 22

Question 23

How should we respond to anticipated change in income
and unanticipated transitory and permanent shocks

Answer 23

Question 24

Draw BC with and without Borrowing constraints

Answer 24

Question 25

Borrowing constraint binding and not binding

Answer 25

Question 26

Question 27

Question 28

Precautionary savings

Answer 28

Question 29

Answer 29