Chapter 4

Question 1

Lifetime budget constraint (2 period)

Answer 1

C1 +C2/(1+r)=Y^ι+Y^ι2/(1+r)

Ie, left is present value of labour income right present value consumption, discount factor for future consumption

Question 2

Euler equation

Answer 2

u’(C1)/(u’(C2)/(1+ρ)) = 1+r

or

u’(C1)/(u’(C2) = (1+r)/(1+ρ)

Question 3

Sustainable level of consumption

Answer 3

Ct=Y^ι+rAt