I read that but I am still in doubt.

Do we have borrowing? Because I assume that we dont spend everything before I get the bonus.

"Ifyou give an individual a $100 bonus, how much of it will they spend? This depends on

the model of household spending we are using. If consumer behaviour is well modelled by

a Keynesian consumption function (i.e. Ct 2 co + c1 (1 t)y,) then households will spend

a fixed proportion of any extra income they receive. In the case of a $100 bonus, they

will spend everything left over once they have paid tax and put some money into savings.

However, if consumer behaviour is better modelled by the permanent income hypothesis

(PIH), then individuals' current consumption is a function of their expected lifetime wealth

(i.e. C, = (fi) \llf). As the bonus is a one-off, itwill only increase expected lifetime wealth by

a small amount, resulting in a small increase in consumption in this and all future periods. This

leads t