Question
Permanent income. 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. 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 as the hypothetical, constant income that has the same value as a households sources of the funds on the right-hand side of the multiyear budget constraint: C1+C2/(1+i1)+C3/[(1+i1)x(1+i2)]+......=(1+i0)x(B0/P+K0)+(w/P)1 x L+(w/P)2 x L/(1+i1)+(w/P)3 x L/[(1+i1) x (1+i2)]+.....
a. use the equation to get a formula for permanent income, when evaluated in year 1. (b) what is the propensity to consume out of the permanent income? (c) if consumption Ct, for t=1,2 and so on is constant overtime, what is the value of permanent income?
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