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Key equation: overall present value of consumption = value of initial assets + overall present value of wage income (7.10) C1 + C2/(1+i1) + C3/[(1+i1).(1+i2)]
Key equation: overall present value of consumption = value of initial assets + overall present value of wage income (7.10) C1 + C2/(1+i1) + C3/[(1+i1).(1+i2)] + ... = (1+io).(Bo/P + Ko) + (w/P)I.L + (w/P)2.L/(1+i1) + (w/P)3.L/[(1+i1). (1+i2)] + ...The idea of permanent income is that consumption depends on a long-run average of income, rather than current income. Operationally, we can define permanent income to be the hypothetical, constant income that has the same present value as a household's sources of funds on the right-hand side of the multi-year budget constraint in equation (7.10). a. Use equation (7.10) to get a formula for permanent income, when evaluated in year 1. b. What is the propensity to consume out of permanent income? . If consumption, C,, is constant over time, what is the value of permanent income
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