Lectures in Macroeconomics- Charles W. Upton Consumption Inheritances

Consumption-Inheritances 2 The Issue Our consumers are selfish, caring only for themselves (and indeed only cared for by themselves). Common sense suggests that there are bequests and inheritances.

Consumption-Inheritances 3 Some Assumptions Two generations – Self and Heir Income is y S and y H. The discount rate is r Everything is certain

Consumption-Inheritances 4 The Key Insight People have a preference function U(c S, c H )

Consumption-Inheritances 5 Indifference Curves cHcH cScS

Consumption-Inheritances 6 The Budget Constraint The basic budget reality c H = y H +(y S -c S )(1+r)

Consumption-Inheritances 7 Maximizing Utility cHcH cScS

Consumption-Inheritances 8 Maximizing Utility cHcH cScS yHyH ysys

Consumption-Inheritances 9 Maximizing Utility cHcH cScS yHyH ysys

Consumption-Inheritances 10 Maximizing Utility cHcH cScS yHyH ysys

Consumption-Inheritances 11 Maximizing Utility cHcH cScS yHyH ysys Does it matter if the government borrows to pay its bills? Suppose it cuts taxes by $100, with the heir to pay $100(1+r)

Consumption-Inheritances 12 The Budget Equation

Consumption-Inheritances 13 The Budget Equation

Consumption-Inheritances 14 Government Borrowing cHcH cScS yHyH ySyS yH*yH* yS*yS*

Consumption-Inheritances 15 Government Borrowing cHcH cScS yHyH ySyS yH*yH* yS*yS* All we have done is extended the budget line

Consumption-Inheritances 16 Government Borrowing cHcH cScS yHyH ySyS yH*yH* yS*yS* All we have done is extended the budget line No change in consumption

Consumption-Inheritances 17 Government Borrowing cHcH cScS yHyH ySyS yH*yH* yS*yS* All we have done is extended the budget line No change in consumption An obvious qualification. We get this result if and only if (iffi) the consumer is leaving some money to his heir

Consumption-Inheritances 18 Government Borrowing cHcH cScS yHyH ySyS yH*yH* yS*yS* All we have done is extended the budget line No change in consumption An obvious qualification. We get this result if and only if (iffi) the consumer is leaving some money to his heir The operative phrase is some; it does not matter how much

Consumption-Inheritances 19 End ©2005 Charles W. Upton. All rights reserved