Lecture 23 - Government debt. After studying this chapter you will be able to understand: The size of the . government’s debt, and how it compares to that of other countries; problems measuring the budget deficit; the traditional and Ricardian views of the government debt; other perspectives on the debt. | Review of the previous lecture 1. Modigliani’s Life-Cycle Hypothesis Income varies systematically over a lifetime. Consumers use saving & borrowing to smooth consumption. Consumption depends on income & wealth. 2. Friedman’s Permanent-Income Hypothesis Consumption depends mainly on permanent income. Consumers use saving & borrowing to smooth consumption in the face of transitory fluctuations in income. 3. Hall’s Random-Walk Hypothesis Combines PIH with rational expectations. Main result: changes in consumption are unpredictable, occur only in response to unanticipated changes in expected permanent income. 0 Review of the previous lecture 4. Laibson and the pull of instant gratification Uses psychology to understand consumer behavior. The desire for instant gratification causes people to save less than they rationally know they should. 1 Lecture 23 Government Debt Instructor: Prof. Dr. Qaisar Abbas 2 This chapter sets up the IS-LM model, which chapter 11 then uses extensively to . | Review of the previous lecture 1. Modigliani’s Life-Cycle Hypothesis Income varies systematically over a lifetime. Consumers use saving & borrowing to smooth consumption. Consumption depends on income & wealth. 2. Friedman’s Permanent-Income Hypothesis Consumption depends mainly on permanent income. Consumers use saving & borrowing to smooth consumption in the face of transitory fluctuations in income. 3. Hall’s Random-Walk Hypothesis Combines PIH with rational expectations. Main result: changes in consumption are unpredictable, occur only in response to unanticipated changes in expected permanent income. 0 Review of the previous lecture 4. Laibson and the pull of instant gratification Uses psychology to understand consumer behavior. The desire for instant gratification causes people to save less than they rationally know they should. 1 Lecture 23 Government Debt 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 .
