Ch 4 Notes

Utility Maximization

The concept in economics where individuals or firms make decisions to achieve the highest possible satisfaction from their resources, given constraints like income, time, or budget.

Smooth Consumption

The economic idea that individuals prefer to maintain a stable level of consumption over time, rather than experiencing significant fluctuations.

Irving Fisher

An influential American economist known for his contributions to monetary theory and the Fisher Equation, which connects nominal and real interest rates.

Permanent Income

Milton Friedman's concept that individual consumption relies on long-term expected income rather than short-term income.

Life-Cycle Hypothesis

Franco Modigliani's theory that individuals manage consumption and savings throughout their life to achieve stable consumption.

Solow Growth Model

An economic model predicting country growth rates, emphasizing the link between savings, investments, and growth.

Convergence

The concept that poorer economies grow faster than richer ones, leading to catching up in income and living standards.

Absolute Convergence

The theory that all economies will eventually reach the same income level, regardless of initial conditions.

User Cost of Capital (UC)

The annual cost of using a unit of capital, calculated as the sum of the real interest rate and depreciation rate times the capital price.

Desired Capital Stock (K*)

The amount of capital that firms want to hold to maximize profits, determined by the marginal product of capital and the user cost of capital.

Investment Curve

A downward-sloping curve showing that higher real interest rates increase borrowing costs and discourage investment.

Two-Period Model

A framework analyzing consumer behavior in the present and future, focusing on consumption and savings.

Budget Constraint

An equation that states a consumer's total resources across two periods must equal their total consumption in those periods.

Savings/Investment Decision

The difference between current income and consumption, carried over to the future.