Suppose that permanent income is calculated as the average of income over the past 5 years; that is YP= 1/5(Y + Y-1+ Y-2+ Y-3+ Y-4)

1. If you have earned $20,000 per year for the past 10 years, what is your permanent income?
2. Suppose that next year (period t 1) you earn $30,000. What is your new YP ?
3. What is your consumption this year and next year?
4. What is your short-run marginal propensity to consume? Long-run MPC ?
5. Assuming you continue to earn $30,000 starting in period t 1, graph the value of your permanent income in each period, using equation (P1).