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Questions › DSE › DSE 2019 › Q22
0 marksMacroeconomics › Consumption and investment › Intertemporal consumption and the Euler equationHardabout 3 min

DSE 2019 Question 22: Consumption and investment

A consumer lives for two periods 1 and 2. Lifetime utility is U=u(c1)+u(c2)1+ρU=u(c_1)+\dfrac{u(c_2)}{1+\rho}U=u(c1​)+1+ρu(c2​)​. She earns w1,w2w_1,w_2w1​,w2​ and consumption satisfies c1+c21+r=w1+w21+rc_1+\dfrac{c_2}{1+r}=w_1+\dfrac{w_2}{1+r}c1​+1+rc2​​=w1​+1+rw2​​. Assume u(ct)=ct1−σ1−σu(c_t)=\dfrac{c_t^{1-\sigma}}{1-\sigma}u(ct​)=1−σct1−σ​​, t=1,2t=1,2t=1,2. Then, if r≥ρr\ge\rhor≥ρ, it follows that:

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A consumer lives for two periods 1 and 2. Lifetime utility is U=u(c₁)+u(c₂)/(1+ρ). She earns w₁,w₂ and consumption satisfies c₁+c₂/(1+r)=w₁+w₂/(1+r). Assume u(cₜ)=(cₜ^(1-σ))/(1-σ), t=1,2. Then, if r≥ρ, it follows that: (A) None of the above is necessarily true (B) c₁≤ c₂ (C) c₁≥ c₂ (D) c₁=c₂

Also written as: A consumer lives for two periods 1 and 2. Lifetime utility is U=u(c_1)+u(c_2)/(1+rho). She earns w_1,w_2 and consumption satisfies c_1+c_2/(1+r)=w_1+w_2/(1+r). Assume u(c_t)=(c_t^(1-sigma))/(1-sigma), t=1,2. Then, if r>=rho, it follows that:

Consumption and investment has come up 74 times in 7 exams since 2005.

What this question tests

This question is on Intertemporal consumption and the Euler equation, part of Consumption and investment in Macroeconomics.

Choosing consumption over two periods and the condition that links them.

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