Answer Happy

9. Consider a household choosing a plan for current consumption C, and future consumption C₂ according to the Fisher model with two time periods. Both cur- rent and future consumption are assumed to be normal goods. The household receives current Income Y, and expects to receive future income Y₂. You may lg- nore taxes and transfers in this question. Household saving is S = Y₁ - C₁, and the real interest rate received on any saving is r. Assume here that the house- hold has already accumulated assets of positive value A at the beginning of the current period. (a) [3 marks] Noting that the budget constraint on future consumption C₂ is C₂ = Y₂ + (1 + r) (A + S), show how the following present-value budget constraint is derived: C₁+ C₂ 1+r A+Y₁+ Y₂ 1+7 () 12m