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1、Chapter Sixteen1CHAPTER 16ConsumptionA PowerPointTutorialTo Accompany MACROECONOMICS, 6th. ed.N. Gregory MankiwByMannig J. SimidianChapter Sixteen2The consumption function was central to Keynes theory of economicfluctuations presented in The General Theory in 1936. Keynes conjectured that the margin

2、al propensity to consume the amount consumed out of an additional dollar of income is betweenzero and one. He claimed that the fundamental law is that out ofevery dollar of earned income, people will consume part of it and savethe rest. Keynes also proposed the average propensity to consume, the rat

3、io of consumption to income falls as income rises. Keynes also held that income is the primary determinant of consumption and that the interest rate does not have an important role.Chapter Sixteen3Consumptionspending byhouseholdsdependsonautonomousconsumptionmarginalpropensity to consume (MPC)dispos

4、ableincome C = C + c Y, C 0, 0 c 1CYCC determines the intercept on the vertical axis. The slope of the consumption function is lower case c, the MPC.Chapter Sixteen4CYCAPC = C/Y = C/Y + c11APC1APC2This consumption functionexhibits three properties thatKeynes conjectured. First,the marginal propensit

5、y to consume c is between zeroand one. Second, the averagepropensity to consume fallsas income rises. Third,consumption is determined bycurrent income Y.As Y rises, C/Y falls, and so the average propensity to consume C/Y falls. Notice that the interest rate is not included in this equation as adeter

6、minant of consumption.Chapter Sixteen5To understand the marginal propensity to consume (MPC), consider a shopping scenario. A person who loves to shop probably has a large MPC, lets say (.99). This means that for every extra dollar he or she earns after tax deductions, he or she spends $.99 of it. T

7、he MPC measures the sensitivity of the change in one variable, consumption, with respect to a change in the other variable, income.Chapter Sixteen6During World War II, on the basis of Keyness consumption function,economists predicted that the economy would experience what theycalled secular stagnati

8、ona long depression of infinite durationunless the government used fiscal policy to stimulate aggregate demand. It turned out that the end of the war did not throw the United States into another depression, but it did suggest that Keyness conjecture that the average propensity to consume would fall

9、as income rose appeared not to hold.Simon Kuznets constructed new aggregate data on consumption and investment dating back to 1869. His work would later earn him a Nobel Prize. Kuznets discovered that the ratio of consumption to income wasstable over time, despite large increases in income; again, K

10、eynessconjecture was called into question.This brings us to the puzzleChapter Sixteen7The failure of the secular-stagnation hypothesis and the findings ofKuznets both indicated that the average propensity to consume is fairlyconstant over time. This presented a puzzle: Why did Keyness conjectures ho

11、ld up well in the studies of household data and in the studies of short time-series, but fail when long-time series were examined?CYShort-run consumption function (falling APC)Long-run consumption function (constant APC)Studies of household data and short time-series found a relationship between con

12、sumption and income similar to the one Keynes conjectured this is called the short-run consumption function. But, studies using long time-series found that the APC did not vary systematically with incomethis relationship is called the long-run consumption function.Chapter Sixteen8The economist Irvin

13、g Fisher developed the model with which economists analyze how rational, forward-looking consumers make intertemporal choicesthat is, choices involving different periods of time. The model illuminates the constraints consumers face, the preferences they have, and how these constraints and preference

14、s together determine their choices about consumption and saving.When consumers are deciding how much to consume today versus how much to consumein the future, they face an intertemporal budget constraint, which measures the total resources available for consumption today and in the future.Chapter Si

15、xteen9Here is an interpretation of the consumers budget constraint:The consumers budget constraint implies that if the interest rate is zero, the budget constraint shows that totalconsumption in the two periods equals total income in the two periods. In the usual case in which theinterest rate is gr

16、eater than zero, future consumption and future incomeare discounted by a factor of 1 + r. This discounting arises from theinterest earned on savings. Because the consumer earns interest oncurrent income that is saved, future income is worth less than currentincome. Also, because future consumption i

17、s paid for out of savingsthat have earned interest, future consumption costs less than currentconsumption. The factor 1/(1+r) is the price of second-period consumption measured in terms of first-period consumption; it is the amount of first-period consumption that the consumer must forgo to obtain 1

18、 unit of second-period consumption.Chapter Sixteen10Here are the combinations of first-period and second-period consumptionthe consumer can choose. If he chooses a point between A and B, he consumes less than his income in the first period and saves the rest for the second period. If he chooses betw

19、een A and C, he consumes more thathis income in the first period and borrows to make up the difference.First-period consumptionSecond-periodconsumptionConsumers budget constraintSavingBorrowingACBHorizontal intercept isY1 + Y2/(1+r)Vertical intercept is(1+r)Y1 + Y2Y1Y2Chapter Sixteen11The consumers

20、preferences regarding consumption in the two periods can be represented by indifference curves. An indifference curve shows the combination of first-period and second-period consumption that makes the consumer equally happy. The slope at any point on the indifference curve shows how much second-peri

21、od consumption the consumer requires in order to be compensated for a 1-unit reduction in first-period consumption. This slope is the marginal rate of substitution between first-period consumption and second-period consumption. It tells us the rate at which the consumer is willing to substitute seco

22、nd-period consumption for first-period consumption.Chapter Sixteen12First-period consumptionSecond-periodconsumptionWZXYIC1IC2Indifference curves represent the consumers preferences over first- period and second-period consumption. An indifference curve gives the combinations of consumption in the t

23、wo periods that make the consumer equally happy. Higher indifferences curves such as IC2 are preferred to lower ones such as IC1. The consumer is equally happy at points W, X, and Y, but prefers point Z to all the others. Point Z is on a higher indifference curve and is therefore not equally preferr

24、ed to W, X, and Y.Chapter Sixteen13First-period consumptionSecond-periodconsumptionOIC1IC2The consumer achieves his highest (or optimal) level of satisfaction by choosing the point on the budget constraint that is on the highest indifference curve. Here the slope of the indifference curveequals the

25、slope of the budget line. At the optimum, the indifference curve is tangent to the budget constraint. The slope of the indifferencecurve is the marginal rate of substitution MRS, and the slope of thebudget line is 1 + the real interest rate. At point O, MRS = 1 + r.IC3Chapter Sixteen14First-period c

26、onsumptionSecond-periodconsumptionOIC1IC2An increase in either first-period income or second-period incomeshifts the budget constraint outward. If consumption in period one andconsumption in period two are both normal goodsthose that aredemanded more as income rises, this increase in income raises c

27、onsumption in both periods.Chapter Sixteen15Economists decompose the impact of an increase in the real interestrate on consumption into two effects: an income effect and asubstitution effect. The income effect is the change in consumptionthat results from the movement to a higher indifference curve.

28、 Thesubstitution effect is the change in consumption that results from thechange in the relative price of consumption in the two periods.First-period consumptionSecond-periodconsumptionBIC1IC2ACAn increase in the interest rate rotates the budget constraint around the point C, where C is (Y1, Y2). Th

29、e higher interest rate reduces first period consumption (move to point A) and raises second-period consumption (move to point B).New budgetconstraintOld budget constraintY1Y2Chapter Sixteen16The inability to borrow prevents current consumption from exceedingcurrent income. A constraint on borrowing

30、can therefore be expressedas C1 Y1.This inequality states that consumption in period one must be less thanor equal to income in period one. This additional constraint on the consumer is called a borrowing constraint, or sometimes, a liquidity constraint.The analysis of borrowing leads us to conclude

31、 that there are two consumption functions. For some consumers, the borrowingconstraint is not binding, and consumption in both periods dependson the present value of lifetime income. For other consumers, theborrowing constraint binds. Hence, for those consumers who wouldlike to borrow but cannot, co

32、nsumption depends only on current income.Chapter Sixteen17In the 1950s, Franco Modigliani, Ando, and Brumberg used Fishersmodel of consumer behavior to study the consumption function. One oftheir goals was to study the consumption puzzle. According to Fishersmodel, consumption depends on a persons l

33、ifetime income. Modigliani emphasized that income varies systematically over peopleslives and that saving allows consumers to move income from thosetimes in life when income is high to those times when income is low. This interpretation of consumer behavior formed the basis of his life-cycle hypothe

34、sis.Chapter Sixteen18In 1957, Milton Friedman proposed the permanent-income hypothesisto explain consumer behavior. Its essence is that current consumption isproportional to permanent income. Friedmans permanent-income hypothesis complements Modiglianis life-cycle hypothesis: both use Fishers theory

35、 of the consumer to argue that consumption should not depend on current income alone. But unlike the life-cycle hypothesis, which emphasizes that income follows a regular pattern over a personslifetime, the permanent-income hypothesis emphasizes that peopleexperience random and temporary changes in

36、their incomes from yearto year.Friedman suggested that we view current income Y as the sum of twocomponents, permanent income YP and transitory income YT.Chapter Sixteen19Robert Hall was first to derive the implications of rational expectationsfor consumption. He showed that if the permanent-income hypothe