Intermediate Macroeconomics: Consumption

Intermediate Macroeconomics: ConsumptionEric SimsUniversity of Notre DameFall 20121 IntroductionConsumption is the largest expenditure component in the US economy, accounting for between60-70 percent of total GDP. In this set of notes we study Consumption decisions. In micro youprobably studied how people choose Consumption among different goods in the cross-section: forexample, how many apples and oranges to consume. In macro we study Consumption in the timeseries dimension: how much total Consumption does one do today versus in the as to study the behavior of Consumption as a whole in the time series dimension, we engagein the fiction that households only consume one good. I will consistently refer to this one goodthroughout the course as fruit, though in reality it is more like a composite good or a basketof goods.

happiness or overall satisfaction. We assume that overall lifetime utility, U, is equal to a weighted sum of utility from consumption in the present and in the future periods: U= u(C t) + u(C t+1); 0 <1 is what we call the discount factor, and it is constrained to lie within 0 and 1. It is a measure of

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  Satisfaction, Consumption

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