Class 14: "Focus on Consumption and Investment"

1. In class we went over the four most important factors that affect household consumption. Go through each of these and explain why they affect consumption and in what direction (i.e., a rise in XYZ will cause consumption to fall, etc.).

2. Explain the permanent-income hypothesis. What does this hypothesis imply about the ability of a stimulus policy such as a one-time government check sent to every household to work?

3. How can demographic factors help explain the high savings rate in China today?

4. Discuss the two most important factors that affect Investment (recall "Investment" refers to goods purchased by firms ... which are of course used in the production of other goods).

5. Do economists care about the stock market in terms of any direct impact it may have on the factors that drive the macroeconomy? Yes or no and briefly explain.

6. How did rising house values 2002-2005 affect the spending of households (consumption) and hence aggregate demand? How did the popping of this bubble in 2006 (significant drops in home values since this time) affect spending?