Get a bonus, a raise, or a promise from the central bank — and see why a household that plans ahead spends on expectations, not just on today's pay (the ideas behind the 2026 Nobel prize in economics).
Understand why a forward-looking household spends out of expected lifetime income and expected interest rates, and why that is what lets a central bank steer the economy by shaping expectations.
Keep the 10-year horizon and the $5,000 one-off bonus. Read off how much is saved this year, and how much of each extra $100 received once is spent now.
Before you act, predict what will happen. Most of the bonus is saved. Where does the rest go, and why does the spending line stay flat? Then do it — did your prediction match what happened?
Income vs. planned spending
Each year of the plan: what arrives (bars) and what the household plans to spend (line). A flat line over a bumpy bar is consumption smoothing.
A forward-looking household decides how much to spend by looking at the whole road ahead, not just this month's pay slip. Robert Hall showed that if people smooth their consumption over time, spending reacts to news about lifetime income: a one-off bonus is mostly saved and spread over many years, while a permanent raise is spent in full, because it changes what the household can afford every year from now on. The same logic makes expected interest rates matter. If the household expects borrowing to be cheap and saving to pay little for the next few years, it pulls spending forward; if it expects high rates, it postpones. Michael Woodford built this household into models of the whole economy and drew the policy lesson: because households and firms plan ahead, a central bank changes the economy not only by moving today's interest rate but by credibly announcing where rates will go. Their models start from individual decisions like these and add them up, which is why the 2026 Sveriges Riksbank Prize cited them for the microeconomic foundations of macroeconomic stabilisation. The older models, which tied spending to current income, could not see expectations at work — and failed when the 1970s oil shocks arrived.
You are one household with a planning horizon, a possible bonus, a possible raise, and a message from the central bank. The chart draws your income and your planned spending year by year, and three figures show spending now, what you save or borrow, and what consumer demand would do if every household planned like you. Swap a bonus for a raise and the spending line barely moves, then jumps; shorten the horizon to one year and the household becomes hand-to-mouth; promise low rates for a few years and spending rises before income does — until you set trust to zero and the promise does nothing.