ECO 3152 Lecture Notes - Lecture 9: Real Interest Rate, Nominal Interest Rate, Budget Constraint
16 Nov 2018
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Consumer"s consumption-savings decision, trade-off between current and future consumption: dynamic decision, implications over more than one period of time. First period = current period, second period = future period. Assume there are m consumers - where m is a large number: co(cid:374)su(cid:373)ers do(cid:374)"t (cid:373)ake a work - leisure decision, simply receive exogenous income, allows us to focus on the consumers consumption-savings decision. Lower case y = consumers real income in the current period. Lower case y" = real income in the future period. Lower case means variables are at the individual level. Primes will denote variables at the individual level. Each consumer pays lump sum taxes, t and t" in the future. Income will differ, but all consumers pay the same tax. Lower case s = consumers savings in the current period. Consumer budget constraint in the current period is (all lower case) : c + s = y - t.
