Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A waterside worker is commencing his last decade prior to retirement. His disposable income during this decade will be 1000 (thousands of dollars). He expects

A waterside worker is commencing his last decade prior to retirement. His disposable income during this decade will be 1000 (thousands of dollars). He expects to live one further decade beyond retirement but to have no disposable income in that period. The bond market offers a nominal interest rate of i = 0.7 (70%) per decade and no inflation is expected between the two decades, implying the price level P=1 in both decades. His discount rate is =0.5 (50% per decade) and the elasticity of his decade utility to his decade consumption is 0.6, implying that period utility depends on period consumption as Ut = ACt0.6, where A is a constant for which calibration is not needed.

a)Formulate the worker's inter-temporal budget constraint and illustrate it in a diagram.

b)Use the Euler equation for optimal inter-temporal choice (below) to calculate how much the worker consumes and saves. From these derive his saving rate out of his disposable income.

c)Explain whether this person's saving rate out of disposable income would increase or decrease if the yield on bonds rose.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Legal Environment

Authors: Jeffrey F Beatty, Susan S Samuelson

3rd Edition

0324537115, 9780324537116

More Books

Students also viewed these Economics questions

Question

Be straight in the back without blowing out the chest

Answered: 1 week ago

Question

Wear as little as possible

Answered: 1 week ago

Question

Be relaxed at the hips

Answered: 1 week ago