ECON20002 Lecture Notes - Lecture 7: Utility, Nominal Interest Rate, Demand Curve
27 Jul 2018
School
Department
Course
Professor
Document Summary
Consumer makes decisions based on both current and future consumption. Helps understand factors that determine how much people save. Extending consumer choice model to include saving and borrowing. Behaviour quirks/issues in decision-making present and future. Consumer"s objective is to determine their consumption over two periods. Each period, consumer purchases a composite of goods, c1 and c2. Basket of goods where number of products is fixed. No possibility of saving/borrowing in the future period. No period after this for consumer to spend savings or repay borrowings. Mrtp the marginal rate of substitution (mrs) between present and future consumption. Willing to trade off more future consumption relative to present consumption. How much you"re willing to give up of 1 to get 2. Budget constraint in two-period models can be expressed in either future or present value key is being consistent. In each period total consumption total income. Excess spending must be financed by borrowing at a nominal interest rate of i.
