(b) Suppose output follows a nonstationary stochastic process like eq. (38) in the text, - Y+1 Yp(Y-Y-1) ++1 where 0 t, (E+1-E)Y = (1+ p + ... + p - (1+1)) ( +1 = 1-ps-r 1-p

(c) Conclude that for the permanent-income consumption equation (32), the con- sumption innovation on date +1 is C++1 - C = 1+r 1+r-p -1+1 1+r 1+r-p -(Yr + EYr+1). 5.