ECON 345 Lecture Notes - Lecture 3: Utility, Indifference Curve, Double-Entry Bookkeeping System
Document Summary
Two period model with a single macro good, allocated to agents as an endowment in each of two periods. Agents live only two periods, receive y1 and y2, and wish to pick consumption levels c1 and c2. Agents maximize utility by consumption smoothing; picking balanced consumption" over two periods that minimizes consumption variance. This is because marginal utility falls the more one consumes in any one period. Only asset (there could be many) is a one year bond, traded in first period and redeemed in the second. Since the bond market only open once, there is only one equilibrium interest rate for the two periods. How we define agent" will depend on context: agent could designate an individual, or a country: an agent faces a budget constraint in the first period of the following form: Period one: y1 = c1 + b1 [1] If y1 > c1, then b1 > 0 (lender, demands bonds)
