Consider the consumption-savings model from the notes. (a) Use the Euler equation and the household budget constraint
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Question:
Consider the consumption-savings model from the notes.
(a) Use the Euler equation and the household budget constraint to evaluate the comparative static c 1/y1.
(b) Do the same for the comparative static c 1/y2. Compare with your answer from (a) and interpret.
(c) Discuss the substitution effect on t = 1 consumption (c 1) associated with an increase in t = 2 income (y2)
Expert Answer:
a To evaluate the comparative static c y1 we start with the Euler equation which states uc1 uc2 1 r ... View the full answer
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