The budget constraint facing an individual planning his or her consumption over two periods is an intertemporal one in which the present value of consumption expenditures must equal the present value of incomes in the two periods:
C0 + C1/(1 + r) = Y0 + Y1(1 + r)
Where Y and C represent income and consumption respectively and the subscripts represent the two time periods.
a. Explain the meaning of this constraint.
b. If Y0 > C0, this individual is saving in period 0. Why does this imply that Y1 < C1?
c. If this individual is saving in period 0, why is Y0 - C0 less than C1 – Y1?