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Unformatted text preview: Economics 101 Marek Kapiˇ cka Intermediate Macroeconomic Theory Spring 2011 Problem Set 5 Solution Please write your name and your section on the top of your problem set. 1 Perfect Complements Suppose that a consumer has current period income y = 230, future period income y = 180, pays current taxes t = 60 and future taxes t = 70, and faces a real interest rate r = 0 . 1, or 10% per period. The consumer would like to consume equal amount in both periods; that is, he would like to set c = c , if possible. However, the consumer is faced with a credit market imperfection, in that he or she cannot borrow at all, that is, s ≥ 0. 1. Show the consumer’s lifetime budget constraint and indifference curves in a diagram. If the consumer could borrow and lend at the real interest rate, r = 0 . 10, then the consumer’s lifetime budget constraint would be given by c + c 1 + r = y- t + y- t 1 + r ....
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This note was uploaded on 12/26/2011 for the course ECON 101 taught by Professor Dumbass during the Fall '08 term at UCSB.
- Fall '08