ECON 20 Lecture Notes - Lecture 16: September 11 Attacks, Consumption Function, Government Simulation Game
Document Summary
The interest rate is effectively the reward for saving. Therefore, when the fed lowers interest rates, they are lowering the reward for saving. Furthermore, lower interest rates will reduce the amount of money households need to service their existing debt, which will make more money available for them to consume. The link between interest rates and consumption constitutes one way in which fed policy affects overall macroeconomic activity. (3) expectations of future income: consumer confidence. Consumers make their spending decisions based not only on current income, wealth, etc. , but also with an eye toward future conditions. Indeed, the importance of expectations is a major theme in modern research on consumption: if households expect income to rise in the future, they will consume more today for a given level of current income. Therefore, the consumption function shifts upward: in an important sense, higher expected future income is similar to an increase in wealth.
