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14 Cards in this Set
- Front
- Back
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Extra Credit Number |
1701D |
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w/P What does this stand for? |
real wage rate |
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C + (1/P) * ΔB + ΔK = (w/P) * L + i * (B/P + K) what does this equation mean? What does real income consist of? |
Consumption + Real Saving = Real Income Real Income: real wage income ( (w/P) * L ) and real asset income, ( ( i * (B/P + K) ) |
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what is the slope of a budget line? how do we determine a households amount of consumption and savings? what is the link between todays and tomorrows budget contraint? |
-1 by studying the households choices of consumption at different points in time. the effect of today's real saving (1/P) * ΔB + ΔK on tomorrows real assets (B/P + K) |
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What does this equation mean? The subscripts are on bottom C1+ (B1/P+ K1) – (B0/P + K0) = (w/P)1 * L + i0* (B0/P+K0) What does (B1/P + K1) – (B0/P + K0) mean? |
Consumption in year 1 + real saving in year 1 = real income in year 1
change in real assets (or saving) in year 1 |
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C2+ (B2/P + K2) – (B1/P + K1) = (w/P)2 * L + i1 * (B1/P+K1) |
Consumption year 2 + real saving year 2 = real income year 2 |
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what do we do to describe a households choice between consuming this year and next year? B1/P + K1 = B0/P + K0 + i0 * (B0/P + K0) + (w/P)1 * L - C1 And what do we do for year 2? |
Combine both year 1 and year 2 budget constraints gives you: real assets end year 1 = real assets end year 0 + real income year 1 - consumption year 1. Its does the same for year 2 just with different subscript variables. real assets end year 2 = real assets end year 1 + real income year 2 - consumption year 2. |
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How do we combine the equations? what does the 1 and i0 mean in (1 + i0)? what happens to real assets, (B1/P + K1) if consumption lowers by one unit? |
B1/P + K1 = (1 + i0) * (B0/P + K0) + (w/P)1 * L - C1 on the right hand side we multiply: (1 + i0) * (B0/P + K0) + (w/P)1 1 in this equation is the principal of year 1
io = the interest paid on the assets Real assets will rise by one unit |
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How is this equation updated? B2/p + K2 = (1+i1) * (B/P + K1) + (w/p)2 * L - C2 |
Everything is updated by one year. These are the building blocks to the combination |
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how do you conduct a two (multiple year) year budget constraint? And what is this equation? |
C1+ C2/(1+i1) = (1+i0) * (B/P + K0) + (w/P)2 * L/(1+i1)1- (B2/P + K2)/(1+i2) |
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what is the discount factor? |
1+ i1 this is used to determine the present value of year 2's income when dividing by this factor |
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Utility when does it increase? what is smooth consumption? |
A term for satisfaction or happiness When consumption in year 1, 2, or any other year rises. the consumption levels between different years tend to be close to each other. |
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Income Effect |
This is the increase in the initial assets or wage incomes. An increase in this (V) leads to higher consumption in both years. |
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Intertemporal Substitution Effect |
an effect to substitution over time. this motivates households to save more when the interest rate rises |
