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Unformatted text preview: and the real interest rate is 5% across all periods. (a) What is the expected value of earnings in middle age? Given this number, what is the present value of lifetime labor earnings? If the consumer wants to have constant expected consumption over his entire life, how much will he consume in each period? How much will he save in each period? (b) Suppose the consumer wants consumption of at least $20,000 in each period. This means considering the worst outcome for income in middle age. If income is only $40,000 in middle age how much should he consume when young to guarantee consumption of at least $20,000 in each period? (c) What eﬀect does uncertainty about income have on saving (or borrowing) by young consumers? 2...
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This note was uploaded on 04/30/2011 for the course ECON 234 taught by Professor Koki during the Spring '11 term at Punjab Engineering College.
 Spring '11
 koki
 ISLM Model

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