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Unformatted text preview: π = π e .5(U – U N ), then the expected inflation will be set to 20%. 3. Suppose that Mr. Modigliani will work 40 more years and live for 50 more. He will earn $10,000 per year for the first 20 and $20,000 for the subsequent 20 years. a. According to the lifecycle consumption theory, with no liquidity constraints, how much will he consume this year and how much 20 years from now (that is in year 21)? Explain. b. If instead he faces a liquidity constraint that prevents him from borrowing against future income, how much does he consume now and in 20 years? Explain....
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This note was uploaded on 04/13/2008 for the course ECON 53 taught by Professor Barbezat during the Spring '08 term at UMass (Amherst).
 Spring '08
 Barbezat
 Macroeconomics, Deficit

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