1. KYIV SCHOOL OF ECONOMICS MACROECONOMICS I September-October 2013 Instructor: Maksym Obrizan Lecture notes II # 2. CHAPTER 16 Consumption Household consumption is the primary focus of policymakers and the economic science Consumption decisions determine how the economy will evolve in the short and the long run # 3. This lecture We will consider how the economic thought about consumption evolved over time # 4. Quote from Mankiw: “Keynes conjectured that the marginal propensity to consume—the amount consumed out of an additional dollar of income—is between zero and one.” Average propensity to consume -

2. # 5. On the role of the interest rate according to Keynes # 6. Empirical successes and failures of the Keynesian approach # 7. Irving Fisher and Intertemporal Choice Keynesian approach to consumption ignores any intertemporal aspects of consumption decisions # 8. Deriving the budget constraint

3. # 9.# 10. Discussion # 11. Consumer preferences# 12. Continued

4. # 13.# 14. Consumption smoothing # 15. Figure 16-6# 16. The change in the real interest rate

5. # 17. Figure 16-7# 18. Borrowing constraint # 19.# 20.

6. # 21. Franco Modigliani and the Life-Cycle Hypothesis Quote from Mankiw: “Modigliani emphasized that income varies systematically over people’s lives and that saving allows consumers to move income from those times in life when income is high to those times when it is low.” # 22. The hypothesis # 23. Discussion# 24. Figure 16-12

7. # 25. Milton Friedman and the Permanent- Income Hypothesis # 26. Implications # 27. Robert Hall and the Random-Walk Hypothesis Robert Hall showed “… that if the permanent- income hypothesis is correct, and if consumers have rational expectations, then changes in consumption over time should be unpredictable.When changes in a variable are unpredictable, the variable is said to follow a random walk.” (Mankiw 2005) # 28. Implications

8. # 29. Recent developments# 30. Conclusions # 31.# 32.