Consider a Ramsey household that maximizes the expected value of lifetime utility with CRRA preferences: _ 00 1 Cal6 U _ thl (1+p)t 1'9 (a) [UPLOAD WORKING] If the intertemporal elasticity of substitution 1/6 is very small and/or 1' = p, why will consumption be essentially equal to "permanent income" (an annuity out of the present value of after-tax wealth and labour income)? Under this "permanent income hypothesis" (PIH), explain why a temporary decrease in government spending would have effectively no impact consumption even if it lowers income. (4 points) (b) [TYPE IN TEXT EDITOR] What is the empirical evidence for or against the PIH based on aggregate data and household data? Specically, discuss how permanent and transitory shocks appear to affect consumption according to the literature discussed in lecture. (4 points) (c) [TYPE IN TEXT EDITOR] What are the implications of heterogeneity in household resources, idiosyncratic income risk, and different liquidity of assets for whether a temporary increase in government spending would have an impact on consumption? (3 points]