ECO 407 Lecture Notes - Lecture 16: Utility, Ricardian Equivalence, Random Walk
Document Summary
In this chapter, we learn: the neoclassical consumption model. Individuals choose consumption at each moment in time: goal: maximize a lifetime utility function function depends on current and future consumption, people recognize that income in the future may differ from income today, such differences influence consumption today. The intertemporal budget constraint: two budget constraints, each with the form consumption equals income less saving , c = consumption, y = income f = financial wealth. Save and consume 1 + r units in the future. Utility maximized when agents are: indifferent between consuming more today or more tomorrow. Impatient, consumption growth is lower: higher r, patient, consumption growth is faster, euler equation, explains how interest rates and growth rates are related. Borrowing constraints: a key assumption of the model is the ability to freely save or borrow at the interest rate r, however, some people may not be able to borrow, bad credit history, bad economy, thus:
