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Consider an economy in which a representative household lives for two periods (year t and year t + 1). The representative household derives utility from
Consider an economy in which a representative household lives for two periods (year t and year t + 1). The representative household derives utility from consumption and discount the future at rate . The households life time utility is given by: U=lnct+ (Beta)lnct+1 The household receives income from work in both period yt and yt+1 respectively and has no financial wealth. The inter-temporal budget constraint for an household can be written in present discounted values as ct+ ct+1 =yt+ yt+1 1+R 1+R where you can interpret yt+1 as expected income. a) (5 marks) Write down the maximization problem in a lot of detail. b) (10 marks) Derive the optimal conditions to obtain the Euler Equation. c) (5 marks) Interpret the Euler Equation
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