Consider the following two-period consumption-saving model: Max C (BC2)}, C1,C2 subject to the following constraints Y1 =C1+S, Y2 = C2 – (1+r)S. %3D -
Consider the following two-period consumption-saving model: Max C (BC2)}, C1,C2 subject to the following constraints Y1 =C1+S, Y2 = C2 – (1+r)S. %3D -
Chapter1: Making Economics Decisions
Section: Chapter Questions
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PlsAnswer the last three question fully with your own knowledge
![Consider the following two-period consumption-saving model:
Max C (BC,)},
C1,C2
subject to the following constraints
Y1 = C1+S,
Y2 = C2 – (1+r)S.
1. Solve for the intertemporal budget constraint
2. Draw the budget constraint (in a graph) with Y1 = 140, Y2 = 70, and r=0.25. Be sure to
label the maximum values of C, and C2 on the y-axis and x-axis.
3. Suppose that ß = 0.8, solve for the optimal values of consumption, C and C5.
%3D
4. Compare your consumption function for period 1 to a consumption function suggested by
John Maynard Keynes (the so-called Keynesian consumption function). Are they different?
5. When r does down, how does C1 change? Does it increase or decrease? Show this mathe-
matically.
6. Compute the marginal propensity to consume in period 1. Does this fall in the range sug-
gested by Keynes?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F717c41c9-7610-4369-a9d8-d14d52c86513%2Fbfdb4794-04ca-4dd9-84d2-daaa7581d4be%2Fr7kd4te_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Consider the following two-period consumption-saving model:
Max C (BC,)},
C1,C2
subject to the following constraints
Y1 = C1+S,
Y2 = C2 – (1+r)S.
1. Solve for the intertemporal budget constraint
2. Draw the budget constraint (in a graph) with Y1 = 140, Y2 = 70, and r=0.25. Be sure to
label the maximum values of C, and C2 on the y-axis and x-axis.
3. Suppose that ß = 0.8, solve for the optimal values of consumption, C and C5.
%3D
4. Compare your consumption function for period 1 to a consumption function suggested by
John Maynard Keynes (the so-called Keynesian consumption function). Are they different?
5. When r does down, how does C1 change? Does it increase or decrease? Show this mathe-
matically.
6. Compute the marginal propensity to consume in period 1. Does this fall in the range sug-
gested by Keynes?
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