Question

Suppose that permanent income is calculated as the average of income over the past 5 years; that is,
YP=1/5(Y+Y_1+Y_2+Y_3+Y_4)
Suppose further that consumption is given as C=0.9YP
I).If you have earn 20,000 per year for the past 10 years, what is your permanent income?

Answer 1

$YP \ = \frac{1}{5}(Y + Y\_1 + Y\_2 + Y\_3+ Y\_4)$

I)

$YP = \frac{1}{5} \times (20000 \times 5)$

$YP = 20000$