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Question A.4 [8 marks] . Consider the Two-Period Endowment Model of the Household studied in class. Suppose that optimal consumption in the first period is

Question A.4 [8 marks]. Consider the Two-Period Endowment Model of the Household studied in class. Suppose that optimal consumption in the first period is given by:

c=1 +rwe,(1)2+r

whereweis the household's lifetime wealth (after taxes). Is the optimal consumption behaviour implied by (1) consistent with thePermanent Income Hypothesis? Why?

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