ECO209Y5- Midterm Exam Guide - Comprehensive Notes for the exam ( 129 pages long!)

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Preferences: more is always preferred to less, diversity is strictly preferred, current consumption and future consumption are normal goods. In summary, (cid:1855) falls for borrowers, but may fall or increase for savers. Literature review: the two-period consumption-saving model was developed by fisher (1906 and, and extended to many periods by ramsey (1928) It has many names: lifecycle model of consumption, permanent income hypothesis, and forward looking theory of consumption: keynes (1936) proposed an alternative hypothesis: consumption depends only on current disposable income. In the keynes theory, individuals are myopic, so future disposable income and the real interest rate don"t matter. In the fisher theory, individuals are forward looking, so these two variables matter. Government budget constraint: current government budget constraint: (cid:1828)= budget deficit, (cid:1846)= taxes, and = government spending, future government budget constraint: a prime denotes future, government present-value budget constraint: (cid:1828)= (cid:1846)