Consumption Suppose a household has preferences given by ELOtMCt) over consumption across periods. Its discount factor and the real interest rate satisfy: 1 + 7" = E. The household starts with no wealth, will receive income go in period t 2 0 and income 9 in every subsequent period, from t = 1 onwards. 1. Use the Euler equation and the budget constraint to nd an expression for initialperiod consumption, c0. 3_C0 2. Compute ay . 3. Suppose 'r : 0.04. What is the marginal propensity to consume out of a purely tempd rary increase in income? Describe in words what a household does with a temporary increase in income. 4. Continue to suppose that r : 0.04. What is the marginal propensity to consume out of a permanent change in income? Describe in words what the household does with a permanent change in income