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Consider the household's budget constraint in real terms over an infinite horizon, y 1 + y 2 / ( 1 + R ) + +
- Consider the household's budget constraint in real terms over an infinite horizon,
y1+y2/(1+R)++(b0(1+R))/P=c1+c2/(1+R)+
Using this condition, evaluate the wealth effect of the following:
- An increase in the price level, P, for a household that has a positive value of initial bonds,b0. (The result has implications for the effects of unexpected price changes on the wealth of nominal creditors and nominal debtors.)
- An increase in the interest rate, R, for a household that hasb0andct=yt in each period.
- An increase in the interest rate, R, for a household that hasb0=0,ct>ytfor t > T, andct<ytfor t < T, where T is some date in the future.
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