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2. The Consumption-Savings Model Recall the consumption-savings model with 10g utility which we studied in class: maximize 109(03) + log(cg+1) Ct,3t,ct+1 subject to Ct +
2. The Consumption-Savings Model Recall the consumption-savings model with 10g utility which we studied in class: maximize 109(03) + log(cg+1) Ct,3t,ct+1 subject to Ct + 3t = yti Ct+1 = yt+1 + (1 + \"3 where q,q+1 are consumptiton choices, 3,; is the net asset position (borrowed or saved money), yt, yt+1 is income in each period, ,6 is the discount factor, and r the interest rate. (A) In a sentence, explain the economic decision problem faced by households in the consumption savings model above. What are the endogenous variables? What does ,6 represent? (B) Show that the two period budget constraints can be combined into a single inter- temporal budget constraint (IBC). What technology does the household have access to that makes this possible? 11
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