A household has an income of 10,000 today and 50,000 tomorrow.

(a) If the real interest rate is 5%, what is the households total income

(i) in terms of todays consumption,

(ii) in terms of tomorrows consumption? What is the households permanent income?

(b) If todays income unexpectedly increases by 1,000, what is the change in permanent income?

(c) If income goes up by 1,000 permanently (in both periods), what is the effect on permanent income?