ECON 3 Lecture Notes - Lecture 13: Real Interest Rate
Document Summary
Saving as a % of gdp: (see graph on ted slide 10) blue = business green = government red = households & institutions. Life cycle - permanent income model of consumption and saving. This model makes assumptions about human behavior and yields predictions that hold quite well in practice. 3 key assumptions: people prefer to smooth their consumption over time rather than experiencing feast or famine. , people are impatient, people are forward looking when they make their current choices. Assumption 1: people prefer to smooth their consumption over time. Suppose someone experiences income that fluctuates wildly over time. (see graph on. Even if income is erratic, consumers want to smooth their consumption. Saving = income - taxes - consumption. (for now, let"s assume there are no taxes. ) Saving < 0, or y < c is called dissaving. Question: suppose you lose your job but expect to find a new one soon. Saving should fall and probably become negative (dissaving).
