ECON 140W - Week 4

Class 7 - Jan. 27, 2026

GST credits and Food Inflation

Canada groceries and essentials benefit
- One-time 50% increase in GST credit (+$400 - $800 this year)
  - If you are single, you get $400, married you get $800
- Five year increase in GST credit by 25% (+150/300) (Why not permanent)
  - 4 years after that, they're increasing it by $150/$300
  - The reason it's 5 years is purely political
  - In the States, it's almost always temporary (a 10-year time horizon)
    - The reason is because it usually loses money and so if you say it'll stop losing money after 10 years, it's fine lol
- This is the fastest way to move money to low-income people
What does GST have to do with groceries or inflation
- Zero GST charged on most groceries
- GST credit has always been indexed to inflation
Are groceries less affordable?
- CPI - Food -> 2015 = 142.5; 2025 = 199.7
- Median weekly wage -> 2015 = $825; 2025 = $1,160
- We're at about exactly the same as we were 10 years ago in terms of affordability

Eligibility for GST Credits

Canadian resident
At least 19 years old
Make less than the maximum income
- Currently just under $60,000 per year for single individual with no children
You must have filed income tax returns
- If you turn 19 this year, make sure you file a tax return!
- Takes like 5 minutes to file a no-income tax return and it's free

Macroeconomic Models

IS-MP-PC (Investment Spending-Monetary Policy-Phillips Curve)
LOOK ON SLIDES!

Aggregate Demand/Supply
LOOK ON SLIDES!

Micro-foundations

Have become very common
Is the behaviour we're assuming people make consistent with the behaviour we see
Macroeconomic models depend on assumptions!
Why does aggregate spending change?
- Changes in real interest rates
- Everything else - tariffs, housing market, stock exchange,

Income, Consumption and Savings

Income, consumption and savings
- Explicitly links income and consumption but Consumption includes savings
- $Y_{D} = C + S$
Consumption function
- $C = A + (M P C) \times Y_{D}$
Marginal propensity to consume (MPC)
- Out of income, how much of it do you spend
- This is usually 0.6 - 0.8 (IT'S ALWAYS LESS THAN 1)
Average propensity to consume (A)
- How much you would spend if you earned no money
- $\frac{C}{Y_{D}}$
Example question: Consider a consumer with a consumption function of
$10,000 + 0.75 × Income

If their income is $60, 000, w h a t p e r c e n t a g e o f t h e i r i n c o m e a r e t h e y c o n s u m i n g ? (A n s w e r t o o n e d e c i m a l p o i n t .)$ \text{Total Consumption} = 10,000+(0.75)\times 60,000 = 55,000\text{Consumption rate} = $

Microeconomics of Consumption

Rational rule for consumers
- This just means explainable - their behaviour follows what we think
- Compare value of consumption today vs. in the future
Consumption smoothing
- Diminishing marginal benefit of consumption in any time-period
- Some people will make lots of money one year and not that much the next, but their consumption evens out
- Increase utility by shifting consumption from times with high consumption levels to times with low consumption levels
Permanent income hypothesis
- The idea that the only thing that matters as a rational individual is that the current consumption should depend on long-term income
- Life cycle savings
  - Spend lots now to make more later and then save until you can spend more when you retire
iClicker question: Overall spending is tied to how people think the economy will go. People who think a recessoin is ocming will spend less but then that makes a recession worse

Macroeconomics in Canada

If people are "rational"
- Temporary income matters less than permanent income
  - if you think that you will get a $400 bonus today but it won't last, then it won't matter as much as your permanent income
  - Most people save the money if they get a temporary cheque
- Anticipated changes in income shouldn't change consumption
  - If you know that you're getting a really amazing job, your spending shouldn't change that much
- Changes in anticipation will change consumption
  - Fourth year student moving along, if you start work in September, it won't change your consumption that much but if you sign that agreement in July, that should change your spending
- Forecasting changes in consumption is hard

Behavioural Economics

Why aren't people always "rational"?
Behavioural constraints - many people don't plan well
- Mila lol
- People who get money right away just spend it
Credit constraints - households don't smooth perfectly
- Nobody will lend you money so you can't spend more than your permanent lifetime income as a student
Hand-to-mouth consumers
- Just consume all income as you earn it
Enough people are rational often enough that average effects work as expected
- We just don't really worry about irrational people in this context

Shifting the Consumption Function

Changes in current income move along a consumption function
Shifting the function
- Interest rates
  - Lower interest rates means it costs less to borrow money so you spend more
  - Vice versa
- Expectations about future incomes
  - If people think they are richer than they thought they would be
- Tax rates
  - Temporary vs. Permanent
  - Temporary bump in your income but permanent is permanent bump in your economy (For lower tax rates)
- Wealth
  - Stock prices, real estate values
  - If the TSX index goes up, people feel richer and in their lifetime spending, people will spend a little more today
  - For most households, the value of most of their wealth is their house
    - If the housing market crashes, there will be a recession
- TODAY'S INCOME DOES NOT CHANGE THE CONSUMPTION FUNCTION, JUST MOVES ALONG

Savings

Savings equals income minus consumption
- For a household, buying stocks or bonds is savings
- Savings is not spending money on consumption and doing anything else with it
- Investment, on the other hand, is businesses creating assets for production

\begin{aligned} Y_{D} & = C + S \\ S & = Y_{D} - C \end{aligned}

All the shifters of consumption also shift savings
Savings varies over the life-cycle
- Income varies over your life in anticipated ways
  - Income usually begins at 15, then at around 20 raises significantly and then slowly up till around 50, then from mid 50s to mid 60s it plateaus and then falls off a cliff afterwards
- Needs vary (maybe)
- Precautionary savings
  - "I'm going to save money in case something terrible happens"
  - Savings rates rose significantly during COVID
  - Usually rise in times of uncertainty - but COVID change might also have been due to closures

Fiscal Policy, Consumption and Savings

When a government lowers taxes or increases transfers as a fiscal policy - what is the goal?
- Short-term - maybe increase consumption?
  - If so, who should they target?
- Long-term - maybe increase savings and physical capital investment?
  - If so, who should they target?

FINISH THE SLIDES

Class 8 - Jan. 29, 2026

What is investment

Capital stock used to product output in the future
- SAVINGS and financial stuff is NOT investment
- Factories, physical assets
Savings is NOT investment (they are related though)
Financial investment is not investment
Types of investment
- Business - IP, equipment, business structures
- Housing construction and renovation
- Changes in inventory

Why does Investment Matter in GDP

Investment is only 18% of GDP
- Roughly half in business investment, half in housing
- Changes in inventories are tiny
Investment fluctuates a lot
- Households smooth consumption
- Businesses don't smooth investment
Changes in physical capital drive economic growth
- At least for a short period of time
- One problem in Canada is physical activity has been low leading to lower GDP which is an ongoing concern in the Canadian economy

Total to Analyze Investments

Compounding and present vs. future value
- $F V = P V \times (1 + r)^{T}$
Discounting and future vs. present value
- - $P V = \frac{F V}{(1 + r)^{T}}$
Real vs. Nominal Interest rates
- How much money will i have - use nominal
- How much purchasing power relative to today - use real

Evaluating Investments

Shift both costs and benefits to present value
Depreciation and discounting matter!
- It makes the math work a little better
- If you earn revenue 10 years from now, it's not worth as much as now
Choosing between the real and nominal interest rates
Two approaches
- Compare present value of stream of future revenue to present cost
  - PV = Next year's revenue / (r + d)
- Convert present cost to rental cost, compare to current revenue
  - User cost of capital = (r + d)*C