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ECN 204 Study Guide - Real Interest Rate, Household Debt, Demand Curve


Department
Economics
Course Code
ECN 204
Professor
Thomas Barbiero

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Chapter 8 Basic Macroeconomic Relationships
8.1 The Income-Consumption & Income-Saving Relationships
The consumption schedule
oReflects the direct consumption-disposable income relationship
oHigher income means higher consumption
The saving schedule
oS = DI C
oHigher income means higher saving
Non-income determinants of consumption and saving
Wealth: dollar amount of all household debt minus its liabilities
Wealth effect: a downward shift of the saving schedule and upward shift of the
consumption schedule due to higher asset wealth
Borrowing: when households borrow, they increase consumption
Expectations: expectations of future prices and income effect current spending and
saving
Real interest rates: when real interest rates (those adjusted for inflation) fall,
households tend to borrow more, consume more, and save less (and vice versa)
More on consumption and saving schedules
Switch to Real GDP: generally the macro models focus on Real GDP
Changes along schedules: movement along the curve are caused by changed in DI or
real GDP
Schedule shifts: changes in wealth, borrowing, expectations, and real interest rates
will shift the entire consumption schedule as well as the saving schedule (in opposite
directions)
Taxation: shift the consumption and saving schedule in the same direction. Taxes
are paid partly at the expense of consumption and partly at the expense of saving.
Thus, an increase in taxes will reduce both C and S
Stability: both C and S schedules are relatively stable, unless altered by a major tax
change. Both C and S schedules are influenced by long-term considerations
8.2 The interest rate-investment
Expected rate of return r
The real interest rate
oI = nominal rate rate of inflation
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