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Week 3: Consumption, Savings and Investment (Factors affect consumption…

- - - - Substitution effect => save more
      - Income effect
        
        Saver: can achieve any future savings target by saving less => saving decrease
        
        Borrower: loss of wealth => save more
      - upward sloping national savings curve (substitution effect dominate)
      - real interest rate = nominal interest rate - inflation (r = i - pi)
  - - - Today: C will increase because of higher current income
      - In the future: C will decrease due to lower expected future disposable income (financed by higher income tax in the future)
      - lifetime income (not current or future income) does not change => consumption will not change
      - Ricardian equivalance: zero net effect on C and S (tax rebate on p.16 lecture slide)
      - Tax cuts can also be financed by government borrowing => no impact on the economy
      - Credit constraint (want to consume but have limited budget)