ECO3020F tutorial 7

currentbudgetconstraint Cts
y t
currentperiodconsumption

E ftp.T mtcurrent
xteTini TEntperiod
income
y consumers

future budget constraint c y t't Itr s
c futureconsumption
y future income
t futurelumpsum taxes
y t futuredisposableincome
Itr s interestandprincipalconsumerearns on their
savings

constraint
Deriving the consumer's lifetime budget
y t itr s isolate s



i
substitute into currentbudgetconstraint
Is t
y z
Ct r r y t
c In y r

The present value of consumption equals the present
value of disposable
income
constraint
Government presentvalue Budget


current period
i.fi
presentvalueof aa

G consumption of goods ofthegovernment in the
G unitspurchased in thefutureperiod
T quantity oftaxescollected incurrent period
T quantity oftaxescollected in futureperiod
constraints forthecurrentandfuture
divideby Itr as we take the budget
and collapse theminto a single time
constraint

, a Lender decrease in current income
decrease in income decrease in lifetimewealth from we to We
lifetime budget constraintshifts left
consumerends up at B afterthe postincome decrease
current and future consumption decrease
consumption decreasesby less than thedecrease in currentincome
Wealth

prime
future
Egg we




ff
ci
1


If IBP

z
t.iq
C We We
12