dynamic model Flashcards
(40 cards)
endowment economy
no production
types of agents/sectors (2)
- consumers
- government
describe two-period economy
- consumers’ choice between current & future consumption via saving
- the government’s choice between current and future taxes
exogenous income variables (2)
- y: consumer’s real income in current period
- y’: consumer’s real income in future period
tax variables (2)
- t: lump-sum taxes in current period
- t’: lump-sum taxes in future period
consumption variables (2)
- c: current consumption
- c’: future consumption
formula for what consumer saves in current period
s = y - t - c
if y - t > c…?
consumer saves (is a lender); s > 0
if y - t < c…?
consumer borrows; s < 0
equation for budget constraint
c + s = y − t
lending & borrowing is done by…?
issuing bonds
a bond issued today pays…?
(1+r) units of consumption in the future
consumer’s future-period budget constraint
c’ = y’ − t’ + (1+r)s
lifetime budget constraint
c + c’/(1+r) = y - t + (y’ - t’)/(1 + r)
lifetime wealth
we = y - t + (y’ - t’)/(1 + r)
utility function (U(c, c’))
captures consumer preferences over c and c’
properties of consumer’s preferences (3)
- more is always preferred to less
- the consumer likes diversity in his or her consumption bundle
- current and future consumption are normal goods
an increase in consumer’s current income causes…? (4)
- lifetime wealth increases
- parallel shift of BC to the right
- current & future consumption increase
- savings increases
aggregate consumption of non-durables and services
smooth relative to aggregate income
aggregate consumption of durables
more volatile than income because durables consumption is economically more like investment than consumption
an increase in consumer’s future income causes…? (4)
- lifetime wealth increases
- parallel shift of BC to the right
- current & future consumption increase
- savings decreases
permanent increase in consumer’s income causes…? (3)
- lifetime wealth increases
- horizontal increase in BC in current period; vertical increase in BC in future period
- current consumption increase
temporary increase in consumer’s income causes…?
consumer will tend to save most of a purely temporary income increase
increase in the real interest rate causes…?
- affected tradeoff between current & future consumption
- steeper BC line