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Macroeconomics, 6/e

Rudi Dornbusch, Massachusetts Institute of Technology
Stanley Fischer, International Monetary Fund, on leave from MIT
Richard Startz, University of Washington
Frank Atkins, University of Calgary
Gordon Sparks, Queen's University

Consumption and Saving

Problems


1		As a share of GDP, how large is consumption and how does it compare to the other three main components. Would you expect consumption's share to increase or decrease in a recession?



2		True or false? Why? "The marginal propensity to consume out of transitory income is greater than the marginal propensity to consume out of permanent income."



3		Assume you define your permanent income as the average of your present income and your income in the previous four years and you always consume 4/5 of your permanent income. Your earnings record over the last five years is: Y_t = 40,000, Y_t-1 = 38,000, Y_t-2 = 36,000, Y_t-3 = 32,000, Y_t-4 = 31,000. What is your consumption in year t and what would be your consumption in year t+1 if your income increased to Y_t+1 = 46,000? What is your short-run marginal propensity to consume? Long-run MPC?



4		Comment on the following statement: "If most people in a nation base their consumption decisions on their current income, rather than their permanent income, then the short-run multiplier is greater than the long-run multiplier."



5		Comment on the following statement: "The so-called 'random walk' model of consumption disproves the permanent income hypothesis."



6		What are the problems of excess sensitivity and excess smoothness? Does the existence disprove the Life-Cycle- Permanent Income Hypothesis (LC-PIH)?

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