325_PracticePS10

325_PracticePS10 - Department of Economics University of...

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Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Practice Problem Set 10 Professor Sanjay Chugh Spring 2011 1. Consumption, Savings, and Financing Constraints. Because the consumption expenditures that occur later in an individual’s lifetime are typically on “bigger-ticket items” (e.g., cars, refrigerators, etc.) and thus more expensive, an individual often has to begin planning for his/her future consumption expenditures well in advance of their actual purchase and use. In contrast, consumption expenditures during the earlier years of an individual’s life are predominantly on “smaller” items (e.g., movies, food, entertainment, etc.) and thus might not require as much “advance planning.” We can analyze this idea in a two-period representative consumer framework. As always, suppose the representative consumer has utility function of period-1 consumption and period-2 consumption given by 12 (, ) uc c . Naturally, period 1 is the “early stage” of an individual’s economic life, and period 2 is the “later stage” of an individual’s economic life. Suppose the financial assets that individuals have at their disposal are “stocks,” just as we studied in Chapter 8. The representative consumer begins period 1 with zero stock holdings (i.e.,
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This document was uploaded on 11/01/2011 for the course ECON 325 at Maryland.

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325_PracticePS10 - Department of Economics University of...

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