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Lecture 111 Macroeconomic Analysis 2003 Consumption.

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Presentation on theme: "Lecture 111 Macroeconomic Analysis 2003 Consumption."— Presentation transcript:

1 Lecture 111 Macroeconomic Analysis 2003 Consumption

2 Lecture 112 Contents Importance of Consumer Confidence Co-movement of Consumption and GDP Five Main Theories of Consumption Reconciliation of Absolute and Permanent Hypothesis Calculation of Life Cycle Income

3 Lecture 113 Consumption and GDP Fluctuate Together

4 Lecture 114

5 5 Theories of consumption

6 Lecture 116 Y C Keynesian Absolute Income Hypothesis 45 0 APC declines with income APC >MPC for low Y APC MPC for high Y

7 Lecture 117 Y P or W C Permanent Income Hypothesis of Consumption Consumption relates to permanent Saving or borrowing for transitory Y APC is constant in the long run

8 Lecture 118 LCF SCF3 SCF2 SCF1 Y C SCF1-SCF3 are short run consumption functions, and LCF is the long run consumption function. APC varies with income in the short run but it is constant in the long run. Reconciliation Between Keynesian and Kuznets Hypothesis

9 Lecture 119 How can short run APC vary but long run APC be constant?

10 Lecture 1110 C-Smoothing YoungAdult Old Saving Borrowing Dissaving C,S,Y Life Cycle Model of Consumption and Saving Modigiani-Ando-Brumberg life cycle hypothesis Smooth consumption and erratic income over life

11 Lecture Life C Random Walk Theory of Consumption -ve +ve Sometimes people consume more than the trend Sometimes people consume less than the trend Shock or noise

12 Lecture 1112 C1 C2 w1 c1 c2 w2 Micro-foundation Model of Consumption Two Period Model of Consumption and Saving Borrowing

13 Lecture 1113 First Order Conditions of Optimisation

14 Lecture 1114 Main Results of the Two Period Model of Consumption

15 Lecture 1115 Optimal Saving and Consumption in Two Period Model

16 Lecture 1116 w2 w1 Endowment and Consumption point Consumption Choices with the Borrowing Constraints A B

17 Lecture 1117 MPC Out of Transient and Permanent Income

18 Lecture 1118 How to Calculate Life Cycle Consumption?

19 Lecture 1119 Indiv idual s Initial incomeTax rate Growth Factor Working life consum ption life Life time Income consump tion A1,000, ,704,534709,010 B50, ,859,57951,064 C40, ,29515,362 D40, ,898,50733,902 E20, ,337,27622,288 F10, ,150,55817,701 Example of Life Cycle Income and Consumption

20 Lecture 1120 Exercises Role of consumer confidence in the economy Absolute income, permanent income and Life cycle income hypothesis Intertemporal model of consumption Consumption smoothing and saving for retirement problems Impact of income tax on consumption Consumption under borrowing constraint Life cycle income-consumption and saving scenarios

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