1. 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:

1. 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.)
2. An increase in the interest rate, R, for a household that hasb0=0 andct=yt in each period.
3. An increase in the interest rate, R, for a household that hasb0=0,ct>yt for t > T, andct<ytfor t < T, where T is some date in the future.