Lecture Macroeconomics - Lecture 22: Consumption - II. This chapter presents the following content: Franco Modigliani: the Life-Cycle Hypothesis; Milton Friedman: the Permanent Income Hypothesis; Robert Hall: the Random-Walk Hypothesis; David Laibson: the pull of instant gratification;. | Review of the previous lecture 1. Keynesian consumption theory Keynes’ conjectures MPC is between 0 and 1 APC falls as income rises current income is the main determinant of current consumption Empirical studies in household data & short time series: confirmation of Keynes’ conjectures in long time series data: APC does not fall as income rises 0 Review of the previous lecture 2. Fisher’s theory of intertemporal choice Consumer chooses current & future consumption to maximize lifetime satisfaction subject to an intertemporal budget constraint. Current consumption depends on lifetime income, not current income, provided consumer can borrow & save. 1 Lecture 22 Consumption-II 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, . | Review of the previous lecture 1. Keynesian consumption theory Keynes’ conjectures MPC is between 0 and 1 APC falls as income rises current income is the main determinant of current consumption Empirical studies in household data & short time series: confirmation of Keynes’ conjectures in long time series data: APC does not fall as income rises 0 Review of the previous lecture 2. Fisher’s theory of intertemporal choice Consumer chooses current & future consumption to maximize lifetime satisfaction subject to an intertemporal budget constraint. Current consumption depends on lifetime income, not current income, provided consumer can borrow & save. 1 Lecture 22 Consumption-II 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 Franco Modigliani: the Life-Cycle Hypothesis Milton Friedman: the Permanent Income Hypothesis Robert Hall: the .
