• Unlike the old Keynesian assumption, new theories conclude that consumption is dependent not only on current income, but also on wealth, expectations and other factors. • If the Real Business Theory is accurate, the Fed cannot have any significant role in influencing the economy, since money are neutral not only in the long run, but also in the short run.
1. Because a change in taxes only relects a change in transitory income , many economists believe that consumption will not change because it is proportional to your permanent income only. 2. Like the Crusoe economy, the Real Business Cycle suggests that all short run fluctuations in the economy are shocks, and that nominal variables have no effect on real ones.
1. In order to change the consumption, policies must affect the permanent income, or the level of wealth, assuming that people form rational expectations. 2. The Real Business Cycle theory argues that the Fed is ineffective and that the economy will remain at its potential, although the potential itself may vary.
*Since changes in consumption are only due to “surprises” then the Fed needs to ensure that their transparency does not hinder policymakers’ ability to issue effective policies. *Consumption depends on people’s expectations more than any fluctuation in income
1. The Fisher model of consumption, which suggests that consumption depends on a person’s lifetime income, is often an underlying cause of debate amongst economists studying consumer behavior.
2. The real business cycle theory is the basis for almost all microeconomic analysis, but it has only recently been getting attention from those studying macroeconomic fluctuations.
1. Because people are more patient in the long run, while in the short run they may be driven by instant gratification, their decision-making processes may be time-inconsistent.
2. People make decisions rationally, so they will base their consumption on expected long term income and wealth rather than on their actual level of income at the time.
1. Although there are many hypotheses that macro-economists follow, it is impossible for one to take into account all variables in the market, causing economists to disagree. 2. People do not always react the way economist envision them to, making reality a very different story from the models.
1. The Life-cycle hypothesis indicates that consumption is based on wealth as well as current income.
2. Random Walk consumption suggests that consumers have rational expectations about future income. Therefore, the only policy changes that will affect consumption are unexpected ones.
3. Consumer preferences are time-inconsistent – in the short run, they value instant gratification, but in the long run they are indifferent.
4. Current income is only one of many factors that determine consumption. Others include wealth, expected future income and interest rates.
5. The Real Business Cycle Theory suggests that the government has little influence on economy because it is guided by fluctuations in the level of technology.
1. According to the life-cycle hypothesis, people save money during years where they are making income in order to provide for retirement. Additionally, during retirement years, some people engage in precautionary saving in case they live longer than they expected. 2. Because the Real Business Cycle Theory assumes that prices are flexible in the short run, it is consistent with the classical dichotomy where money level does not affect real variables. That means any monetary policy the Fed employs will only affect nominal variables.
1.There is more to life than economics 2.People’s decisions regarding consumption are hard to understand using models because men and women are not rational human beings. 3.Great economists like Ricardo, Modigliani, Friedman, Hall and Laibson have provided theories to understand the consumption better, yet Robinson Crusoe makes it clear how and why a worker faces daily economic decisions. 4.The Fisher Model provides a solid base regarding consumption decisions. 5.If people are rational and follow the permanent-income hypothesis then monetary policy would be able to control the economy better.
1. The economy fluctuates over time, and many believe that it is in the best interest for long run economic stabilization to let the economy adjust on its on in the short run, and make macroeconomic policy aimed at improving the long run economy.
2. Consumption is based on permanent income and year-to-year fluctuations in income do not have an affect on the propensity to consume.
1)Real business cycle theory emphasizes the money neutrality in short run and hence denies the impact monetary policy can make to the economy.
2)The basic assumption of economics that human beings are always rational in decision making, conflicts with the time inconsistent behavior found in consumers.
1). If people save their money for a “rainy day” as the Life-Cycle Hypothesis suggests, then Fiscal Policy would be relatively ineffective at increasing or decreasing consumption. Conversely, this would make it easier for the Fed to induce people to save more or less at any given period of time.
2). The Need for instant gratification is not only reflective of people’s irrationality but is also indicative of fiscal policy-makers’ ability to effect consumption, according to the Hyperbolic Discounting Hypothesis.
1. Life-cycle and the permanent income hypothesis assume that the choices consumers make regarding their consumption patterns are determined by their longer-term income expectations 2. Consumers with rational expectations will only change their consumption pattern if the policy changes are unexpected
1.It is possible to change consumption, but to do so, policies must target the level of wealth, and/or the level of income.
2. Time incoonsistency in individual decision making occurs because individuals are more patient over the long term, while in the short term they may be subject to the pull of instant gratification.
1. Shot run tax cuts may actually give consumers and business a false sense of their savings, causing them to over spend. This is futher exacerbated by a rapid change in inflation. 2. Allowing the central bank to only control monetary policy means that they will not be misguided by political pressures.
When making changes to the Macroeconomy, we must understand how different theories can effect the consumption and savings of citizens in the economy.
One primary way we can gauge how the economy will do is by understanding the shocks that come from technology, which affect the output of goods and services.
Economists have provided several theories to explain variations in consumption and saving, but none of them have enjoyed unanimous support.
Real business cycle theory attributes short-run fluctuations in the economy to changes in technology, suggesting that monetary policy has no effect on the economy.
1. There are too many surprises for individuals to accurately estimate their permanent income. 2. Consumers are more patient in the long run than they are in the short run.
19 comments:
• Unlike the old Keynesian assumption, new theories conclude that consumption is dependent not only on current income, but also on wealth, expectations and other factors.
• If the Real Business Theory is accurate, the Fed cannot have any significant role in influencing the economy, since money are neutral not only in the long run, but also in the short run.
1. Because a change in taxes only relects a change in transitory income , many economists believe that consumption will not change because it is proportional to your permanent income only.
2. Like the Crusoe economy, the Real Business Cycle suggests that all short run fluctuations in the economy are shocks, and that nominal variables have no effect on real ones.
1. In order to change the consumption, policies must affect the permanent income, or the level of wealth, assuming that people form rational expectations.
2. The Real Business Cycle theory argues that the Fed is ineffective and that the economy will remain at its potential, although the potential itself may vary.
*Since changes in consumption are only due to “surprises” then the Fed needs to ensure that their transparency does not hinder policymakers’ ability to issue effective policies.
*Consumption depends on people’s expectations more than any fluctuation in income
1. The Fisher model of consumption, which suggests that consumption depends on a person’s lifetime income, is often an underlying cause of debate amongst economists studying consumer behavior.
2. The real business cycle theory is the basis for almost all microeconomic analysis, but it has only recently been getting attention from those studying macroeconomic fluctuations.
1. Because people are more patient in the long run, while in the short run they may be driven by instant gratification, their decision-making processes may be time-inconsistent.
2. People make decisions rationally, so they will base their consumption on expected long term income and wealth rather than on their actual level of income at the time.
1. Although there are many hypotheses that macro-economists follow, it is impossible for one to take into account all variables in the market, causing economists to disagree.
2. People do not always react the way economist envision them to, making reality a very different story from the models.
1. The Life-cycle hypothesis indicates that consumption is based on wealth as well as current income.
2. Random Walk consumption suggests that consumers have rational expectations about future income. Therefore, the only policy changes that will affect consumption are unexpected ones.
3. Consumer preferences are time-inconsistent – in the short run, they value instant gratification, but in the long run they are indifferent.
4. Current income is only one of many factors that determine consumption. Others include wealth, expected future income and interest rates.
5. The Real Business Cycle Theory suggests that the government has little influence on economy because it is guided by fluctuations in the level of technology.
1. According to the life-cycle hypothesis, people save money during years where they are making income in order to provide for retirement. Additionally, during retirement years, some people engage in precautionary saving in case they live longer than they expected.
2. Because the Real Business Cycle Theory assumes that prices are flexible in the short run, it is consistent with the classical dichotomy where money level does not affect real variables. That means any monetary policy the Fed employs will only affect nominal variables.
1.There is more to life than economics
2.People’s decisions regarding consumption are hard to understand using models because men and women are not rational human beings.
3.Great economists like Ricardo, Modigliani, Friedman, Hall and Laibson have provided theories to understand the consumption better, yet Robinson Crusoe makes it clear how and why a worker faces daily economic decisions.
4.The Fisher Model provides a solid base regarding consumption decisions.
5.If people are rational and follow the permanent-income hypothesis then monetary policy would be able to control the economy better.
1. The economy fluctuates over time, and many believe that it is in the best interest for long run economic stabilization to let the economy adjust on its on in the short run, and make macroeconomic policy aimed at improving the long run economy.
2. Consumption is based on permanent income and year-to-year fluctuations in income do not have an affect on the propensity to consume.
1)Real business cycle theory emphasizes the money neutrality in short run and hence denies the impact monetary policy can make to the economy.
2)The basic assumption of economics that human beings are always rational in decision making, conflicts with the time inconsistent behavior found in consumers.
1). If people save their money for a “rainy day” as the Life-Cycle Hypothesis suggests, then Fiscal Policy would be relatively ineffective at increasing or decreasing consumption. Conversely, this would make it easier for the Fed to induce people to save more or less at any given period of time.
2). The Need for instant gratification is not only reflective of people’s irrationality but is also indicative of fiscal policy-makers’ ability to effect consumption, according to the Hyperbolic Discounting Hypothesis.
1. Life-cycle and the permanent income hypothesis assume that the choices consumers make regarding their consumption patterns are determined by their longer-term income expectations
2. Consumers with rational expectations will only change their consumption pattern if the policy changes are unexpected
1.It is possible to change consumption, but to do so, policies must target the level of wealth, and/or the level of income.
2. Time incoonsistency in individual decision making occurs because individuals are more patient over the long term, while in the short term they may be subject to the pull of instant gratification.
1. Shot run tax cuts may actually give consumers and business a false sense of their savings, causing them to over spend. This is futher exacerbated by a rapid change in inflation.
2. Allowing the central bank to only control monetary policy means that they will not be misguided by political pressures.
Talking Points:
When making changes to the Macroeconomy, we must understand how different theories can effect the consumption and savings of citizens in the economy.
One primary way we can gauge how the economy will do is by understanding the shocks that come from technology, which affect the output of goods and services.
Economists have provided several theories to explain variations in consumption and saving, but none of them have enjoyed unanimous support.
Real business cycle theory attributes short-run fluctuations in the economy to changes in technology, suggesting that monetary policy has no effect on the economy.
1. There are too many surprises for individuals to accurately estimate their permanent income.
2. Consumers are more patient in the long run than they are in the short run.
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