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2. Suppose there is no uncertainty and labor income is a constant ow y; = y for all t (with a positive initial wealth no).

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2. Suppose there is no uncertainty and labor income is a constant ow y; = y for all t (with a positive initial wealth no). What is the actual level of consumption or '? Show graphically (putting time t on the horizontal axis) what would the time path of labor income, consumption, saving and asset holdings look like (qualitatively). [Note: saving is equal to total income minus consumption, where total income includes labor income y, and nancial income rat. You can use the budget constraints of the rst two or three periods to deduce what is the amount of saving in each period and the evolution of asset holdings as] 3. Suppose there is no uncertainty, but labor income is subject to regular, perfectly anticipated uctuations: yx= y+A in even periods (i=0, 2, 4, .. .) and yi= y (1+r)A in odd periods (i=1, 3, 5, ...). There is a positive initial wealth no. What is the optimal path of consumption Ct? What is the path of labor income, consumption, saving and asset holdings over time? Show graphically those time paths (including the path of y,) and compare briey with the previous case

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