A Two-Period Model - A Two-Period Model The...

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  A Two-Period Model: The Consumption-Savings Decision and Credit Markets A Two-Period Model Consumers There are m consumers Each consumerLives for two periods: current and future Receives real income y ( y’ ) in the current (future) period Pays lump-sum tax t ( t’ ) in the current (future) period Can borrow (lend) at the real interest rate r Chooses current consumption c, current saving s , and future consumption c’ to make herself as well off as possible Consumer’s Lifetime Budget Constraint The lifetime budget constraint defines the quantities of c and c’ the consumer can acquire, given r, y, y’, t, and t’ It states that the present value of the consumer’s lifetime consumption equals her lifetime wealth we which equals the present value of her lifetime net of tax income Consumer’s Preferences Consumer’s preferences over current and future consumption is described by a utility function, where U is the utility function
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  • Spring '11
  • Leatandre
  • Macroeconomics, credit markets, lifetime budget constraint, future consumption, current consumption

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