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Consider the general period-t nominal budget constraint from the dynamic-consumption savings model, P t c t + A t = (1 + i)A t 1
Consider the general period-t nominal budget constraint from the dynamic-consumption savings model, Ptct + At = (1 + i)At1 + Yt :
(a) Derive an LBC for a three-period model, i.e. for t = 1, 2, 3, assuming a terminal condition of A3 = 0 and an initial condition of A0 = 0.
(b) In the two-period model, we typically assume a terminal condition of A2 = 0. Explain why for the three-period model the terminal condition is instead A3 = 0.
(c) Interpret the LBC. Does the interpretation differ from the two-period model?
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