Topic 5: Consumer Decisions in a Dynamic Model
Videos
Setup for a Simple Dynamic Macro Model
- In the next part of the course, we'll take our static (one period) macro model and make it dynamic by considering two time periods: "current" and "future". This will allow us to study how consumers make intertemporal decisions, like borrowing and saving.
Optimal Consumer Decisions in a Simple Dynamic Model
- Having set up the dynamic model, we now consider how consumers make choices for current and future consumption, as well as borrowing or saving, in order to maximize their lifetime utility, subject to their lifetime budget constraint.
Consumption Smoothing
- Now that we have a dynamic model with multiple time periods, we can introduce the concept of consumption smoothing, when consumers use their ability to borrow and save in order to move resources across time (perhaps in response to income fluctuations) to keep their consumption relatively stable.
Intertemporal Substitution
- We already understand substitution effects from previous videos, and now we can apply the same concept to better understand how consumers respond to changes in the relative price of a good at different points in time.