A consumer has initial real wealth of 20, current real income of 90, and future income of 110. The real interest rate is 10% per period. Hint: The present value budget constraint becomes: C1+ C2/(1+r) = Y1 + Y2/(1+r) + a, where a is the initial wealth.
Find the maximum amount of C1 and C2 that can be attained with this budget.
Suppose the consumer wants to completely smooth consumption (C1=C2). How much will he save and consume in each period?
What will happen to saving and consumption if current income increase by 11?
What will happen to saving and consumption change if future income increases by 11?
What will happen to saving and consumption if both current and future income increase by 10?