Lecture 5 - Intertemporal Choice Flashcards
(10 cards)
1
Q
The future value of income
A
- y-intercept
- Maximum amount of second period consumption
2
Q
The present value of income
A
- x-intercept
- Amount of money in period 1 that would generate the same budget set as the endowment
- Maximum amount of period 1 consumption possible
- Note that you have to be able to pay back everything you borrow with interest
3
Q
Slope of intertemporal budget constraint
A
- Slope = - (1 + r)
- It is the ratio of the price of the good on the x-axis to that on the y-axis
- Says that the price of consumption in period 1 is (1 + r)
4
Q
Future vs present valued budget constraint
A
- These are just different equations for the same budget constraint
- Future valued – all period 1 values are multiplied by (1 + r)
- Present valued – all period 2 values are discounted by (1 + r)
5
Q
Inflation
A
The constrain becomes flatter if the interest rate falls or rises as they both decreases the real rate of interest
6
Q
Identifying borrowers and savers
A
- Borrower = chooses bundle such that c1 > m1
- Saver or lender (lending to period 2) = chooses bundle such that c1 < m1
7
Q
Valuing bonds
A
A bond is a special type of security that pays a fixed amount $x for T years (its maturity date) and then pays its face value $F
8
Q
Perfect substitutes
A
- Slopes of indifference curves would be –1
- Assuming 1 for 1 substitution
- This person doesn’t care whether he consumes today or tomorrow
- MRS between today and tomorrow is –1
9
Q
Perfect complements
A
- Consumer wants to consume equal amounts today and tomorrow (assuming ratio 1:1)
- Unwilling to substitute consumption from 1 period to another
10
Q
Well behaved
A
- Well behaved preferences are somewhere in the middle
- Most typical
- Willing to substitute some amount of consumption today for consumption tomorrow
