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macro Consumption
(chapter 16) (revised 11/19/03)
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint® Slides
by Ron Cronovich
where APC
= average propensity to
consume
= C/Y
3.
C = C + cY
c c = MPC
= slope of
1
the
C consumpti
on function
C = C + cY
APC = _ _ _ _ _ _ _ _ _ _ _ _ _
slope =
APC Y
Consumption function
C from long time series
data (constant APC )
Consumption function
from cross-sectional
household data
(falling APC )
C2 Y2
C1 + = Y1 +
1+ r 1+ r
C2
The budget
constraint
shows all Consump
combinations _____ = income
in both
of C1 and C2
periods
that just Y2
exhaust the _______
consumer’s
resources.
C1
Y1
C2
The slope of
the budget
line equals
_________ ) 1
(1+r )
Y2
C1
Y1
C2 Higher
An ________
indifference
______shows
______ all
curves
combinations represent
of C1 and C2 higher levels
that make the of happiness.
consumer
_______________ Y
___________. Z
X IC2
W IC1
C1
C2 The slope of
an indifference
Marginal rate of curve at any
substitution (MRS ): point equals
the amount of C2 the MRS
consumer would be 1 at that point.
________________ MRS
_________________.
IC1
C1
So the MRS is the (negative) of the
___________________________.
CHAPTER 16 Consumption slide 16
Optimization
C2
The optimal (C1,C2) is At the optimal
where the budget line point,
just touches the highest
__________
indifference curve.
C1
C’ 2 C’2=Y’2
C2= Y2 C2=Y2
Y1 =C1
Y’1 =‘C1
C’1 Y’1
Y1=C
S’
1
C1 ' C1 C1 ' C1
Save part of income: < C moves with Y: =
Y1 ' Y1 Y1 ' Y1
So ________________. So _________________.
CHAPTER 16 Consumption slide 19
Keynes vs. Fisher
Keynes:
current consumption depends only on
current income
Fisher:
current consumption depends only on
________________________________;
the timing of income is irrelevant
because the consumer can borrow or
lend between periods.
As depicted here,
A
______________.
However, it could turn Y2
out differently…
Y1 C1
The borrowing C2
constraint takes
the form:
The budget
______ line with a
borrowing
constraint
Y2
C1
Y1
The borrowing
constraint is not
binding if the
consumer’s
optimal C1
___________.
C1
Y1
The optimal C2
choice is at
point D.
But since the
consumer
cannot borrow,
the best he can E
do is point E.
D
C1
Y1
C2 The rise in
So under
borrowing income to Y’1
constraints, shifts the
current budget
consumption constraint
__________ right. C’1 rises
E
__________ with Y’1.
__________.
Y C1
Y ’1
1=
=
C C
1’
1
Consumption Dissaving
Retirement End
begins of life
CHAPTER 16 Consumption slide 32
Numerical Example
Suppose you start working at age 20,
work until age 65, and expert to earn
$50,000 each year, and you expect to
live to 80.
Lifetime income =
Spread over 60 years, so
C=
So need to save $12,500 per year.
C = C + cY
where only current income (Y) mattered.