Consider an economy with two periods. Households earn Y and Y+1 as endowment income. They can...

 

Transcribed Image Text:

Consider an economy with two periods. Households earn Y and Y+1 as endowment income. They can either save St with a return of (1+r) or consume. Household's utility at time t is given by: U (Ct) = C 1. Write down the household flow budget constraints and interpret economically. (3 points) 2. Derive the intertemporal budget constraint and interpret economically. (3 points) 3. Write down the household's problem and derive optimality conditions. Interpret each condition economically. (8 points) 4. Derive the consumption function and discuss the effects of transitory and permanent income changes on current consumption. (10 points) Consider an economy with two periods. Households earn Y and Y+1 as endowment income. They can either save St with a return of (1+r) or consume. Household's utility at time t is given by: U (Ct) = C 1. Write down the household flow budget constraints and interpret economically. (3 points) 2. Derive the intertemporal budget constraint and interpret economically. (3 points) 3. Write down the household's problem and derive optimality conditions. Interpret each condition economically. (8 points) 4. Derive the consumption function and discuss the effects of transitory and permanent income changes on current consumption. (10 points)