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Assume that Jeannie Drago is trying to allocate her consumption over two periods of life: work and retirement. Each period is to last 20 years.
Assume that Jeannie Drago is trying to allocate her consumption over two periods of life: work and retirement. Each period is to last 20 years. To simplify, assume that all income comes at time tu in the middle of 20 years of work, and all expenditures come at either t or t2, 20 years later. Jeannie's budget constraint is C1 + C2/(1+ r/100) = Y1 + Y2/(1 + r/100), where the real interest rate ris 100 percent (approximately 3.5 percent per year over 20 years). Jeannie's preferences are to have equal consumption each period. a. What are C1 and C2 if Y1 = 1 million and Y2 = 0? b. What are C1 and C2 if Y1 = 0 and Y2 = 1 million (reflecting, for example, an individual who plans to come into a large inheritance late in life)? Do these answers depend on Jeannie's being able to borrow against the inheritance
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