2. Understanding the intertemporal budget constraint Aa Aa Suppose that there ar

Question

2. Understanding the intertemporal budget constraint Aa Aa Suppose that there are only two periods of time: today and tomorrow. You earn income Y and consume C1 today, and you earn Y2 and consume C2 tomorrow. Because you can borrow or save, how would you describe your possible consumption in either time period? Check all that apply. C2 can be less than Y2. G can be more than Y1. c2 must be less than Y2. must be greater than Yi. C2 can be more than Y2. Saving (S) is equal to minus s= Let r equal the real interest rate. Then consumption in the second period equals plus Plugging the saving equation into the formula for consumption tomorrow yields the following result (after some rearranging and algebraic manipulations): C1 + C2 / (1 + r) = This is known as the intertemporal budget constraint.

Explanation / Answer

1. The first four alternatives are correct

Reason: As tge person can borrow or lend, c1 can be less than, greater or equal to Y1. Similarly c2 can be less, greater than or equal to Y2.

2.saving equal income less consumption.

S=Y1-C1

3. Y2×(1+r) *7

4. Y1 +Y2÷(1+r)

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