Lecture Macroeconomics - Lecture 21: Consumption - I. This chapter presents the following content: John Maynard Keynes: consumption and current income; Irving Fisher and Intertemporal Choice; deriving the intertemporal budget constraint;. | Review of the previous lecture 1. Real Business Cycle theory assumes perfect flexibility of wages and prices shows how fluctuations arise in response to productivity shocks the fluctuations are optimal given the shocks 2. Points of controversy in RBC theory intertemporal substitution of labor the importance of technology shocks the neutrality of money the flexibility of prices and wages 0 Review of the previous lecture 3. New Keynesian economics accepts the traditional model of aggregate demand and supply attempts to explain the stickiness of wages and prices with microeconomic analysis, including menu costs coordination failure staggering of wages and prices 1 Lecture 21 Consumption-I Instructor: Prof. Dr. Qaisar Abbas 2 This chapter sets up the IS-LM model, which chapter 11 then uses extensively to analyze the effects of policies and economic shocks. This chapter also introduces students to the Keynesian Cross and Liquidity Preference models, which underlie the IS curve and LM . | Review of the previous lecture 1. Real Business Cycle theory assumes perfect flexibility of wages and prices shows how fluctuations arise in response to productivity shocks the fluctuations are optimal given the shocks 2. Points of controversy in RBC theory intertemporal substitution of labor the importance of technology shocks the neutrality of money the flexibility of prices and wages 0 Review of the previous lecture 3. New Keynesian economics accepts the traditional model of aggregate demand and supply attempts to explain the stickiness of wages and prices with microeconomic analysis, including menu costs coordination failure staggering of wages and prices 1 Lecture 21 Consumption-I Instructor: Prof. Dr. Qaisar Abbas 2 This chapter sets up the IS-LM model, which chapter 11 then uses extensively to analyze the effects of policies and economic shocks. This chapter also introduces students to the Keynesian Cross and Liquidity Preference models, which underlie the IS curve and LM curve, respectively. If you would like to spend less time on this chapter, you might consider omitting the Keynesian Cross, instead using the loanable funds model from Chapter 3 to derive the IS curve. Advantage: students are already familiar with the loanable funds model, so skipping the KC means one less model to learn. Additionally, the KC model is not used anywhere else in this textbook. Once it’s used to derive IS, it disappears for good. However, there are some good reasons for NOT omitting the KC model: 1) Many principles textbooks (though not Mankiw’s) cover the KC model; students who learned the KC model in their principles class may benefit from seeing it here, as a bridge to new material (the IS curve). 2) The KC model has historical value. One could argue that somebody graduating from college with a degree in economics should be familiar with the KC model. Lecture contents John Maynard Keynes: consumption and current income Irving Fisher and Intertemporal Choice 3 Keynes’s .
