EC250 Lecture Notes - Lecture 10: Nominal Interest Rate, Budget Constraint, Indifference Curve
Document Summary
Consumption: biggest component of gdp in developed countries. Consumption smoothing: people try to have equal consumption over their lifetime. The pattern of lifetime savings is determined by consumption smoothing and income. C =a + mpc (y-t) a is the amount of consumption undertaken when disposable income is zero. Marginal propensity to consume (mpc): the additional amount of consumption when disposable income increases by . (5. 1) (cid:882)< mpc (cid:883) Assumed to be constant and supported by cross-sectional and time-series. Keynesian theory cannot explain the drop in consumption that preceded the great. Recession: incomes did not change much, but consumption fell significantly. C=f(y-t,current wealth, expected future wealth, riskiness of expected future wealth) Can consume more if expected future wealth is less risky. Consume more if higher future income/expected future income. The currency of a country with a higher nominal interest rate is expected to depreciation according to interest rates.
