Macroeconomics 12th Edition by Rudiger Dornbusch ,Stanley Fischer,Richard Startz

Exercise 15

Suppose that permanent income is calculated as the average of income over the past five years; that is,
YP = 1/5( Y + Y - 1 + Y - 2 + Y - 3 + Y - 4 ) (P1)
Suppose further that consumption is given by C =.9 YP.
a. If you have earned $20,000 per year for the past 10 years, what is your permanent income
b. Suppose that next year (period t + 1) you earn $30,000. What is your new YP
c. What is your consumption this year and next year
d. What is your short-run marginal propensity to consume Long-run MPC
e. Assuming you continue to earn $30,000 starting in period t + 1, graph the value of your permanent income in each period, using equation (P1).