ECON 222 Lecture Notes - Lecture 5: Real Interest Rate, Consumption Smoothing

24 views3 pages
Verified Note

Document Summary

Recall for chapter 2: if net factor payment (nfp)is zero, the national saving. S equals to y-c-g (note: y-output; c-consumption; g-government spending) Therefore, we can deduce the following function: s^d=y-c^d-g (note: s^d is the total of private and government saving) The consumption and saving decision of individual. Assume the real interest rate is r. then for 1 dollar today will worth 1+r in next time period. If a person borrows 1 dollar this year, he has to pay 1+r dollar next time period. Similarly, if that person saves 1 dollar this year, he can get 1+r dollar next time period. Therefore, 1+r is the price of a dollar current consumption is terms of future consumption. *two ways of choice making: borrow heavily and consume more than the person"s income today, save nearly all of the income. Avoid periods of very high or very low consumption which is known as consumption- smoothing motive.

Get access

Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers
Class+
$8 USD/m
Billed $96 USD annually
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
30 Verified Answers

Related textbook solutions

Related Documents

Related Questions