1. Carefully explain the major differences between Keynes’ and Fisher’s models of consumption. 

2.  A family of four has an income of $15,000 today and will earn $24,000 tomorrow. i. If the family consumes $11,500 in the first period and $15,000 in the second period, what is the interest rate? ii. If the family consumes $15,000 in the first period and $13,500 in the second period, what is the interest rate? iii. Explain the income and substitution effects and discuss which effect dominated after the interest rate change from part (a) to part (b.). 

3. Keynes viewed consumption as an activity based on psychology. Briefly discuss how the work of David Laibson supports Keynes’ view?

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1 Keynes Model of Consumption According to the consumption theory of Keynes if the income increases the consumption will also increase but not in the ... View the full answer