Consider Figure 16.7 below, which shows the federal funds rate and household consumption. For your answers, use a logarithmic utility function.
(a) What is the relationship between consumption growth and the interest rate according to
the Euler equation?
(b) Does the data in the figure support or reject this relationship for the entire period? Explain.
(c) What might help explain consumption behavior, particularly in 2008-2009?Figure 16.7: Federal Funds Rate and Household Consumption: 2002-2016
(Source: Federal Reserve Economic Data, St. Louis Federal Reserve)

Question

Consider Figure 16.7 below, which shows the federal funds rate and household consumption. For your answers, use a logarithmic utility function.
(a) What is the relationship between consumption growth and the interest rate according to
the Euler equation?
(b) Does the data in the figure support or reject this relationship for the entire period? Explain.
(c) What might help explain consumption behavior, particularly in 2008-2009?Figure 16.7: Federal Funds Rate and Household Consumption: 2002-2016  
(Source: Federal Reserve Economic Data, St. Louis Federal Reserve)

Quizplus · Accepted Answer

The Answer of Consider Figure 16.7 below, which shows the federal funds rate and household consumption. For your answers, use a logarithmic utility function.
(a) What is the relationship between consumption growth and the interest rate according to
the Euler equation?
(b) Does the data in the figure support or reject this relationship for the entire period? Explain.
(c) What might help explain consumption behavior, particularly in 2008-2009?Figure 16.7: Federal Funds Rate and Household Consumption: 2002-2016  
(Source: Federal Reserve Economic Data, St. Louis Federal Reserve)