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Consider an inter-temporal consumption model with infinite horizon consumers and perfect capital markets. (i) Explain why consumption is a function of wealth, including human wealth.

Consider an inter-temporal consumption model with infinite horizon consumers and perfect capital markets.

(i) Explain why consumption is a function of wealth, including human wealth.

(ii) Assume that utility takes the form , where ct is consumption in period t. Write down the consumption Euler equation in this case. Will there be precautionary saving by consumers in this case?

(iii) Explain whether Ricardian Equivalence will hold when there is precautionary saving by consumers.

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