What is the mpc marginal propensity to consume

Reference no: EM13201190

Consider a farmer who has access to a bond market where she can borrow or lend at the interest rate R. Assume also that her money holdings nominal balances and the price level stay constant over time.

a) Write down the “life-time” budget constraint of this farmer, assuming that her planning horizon extends only two periods into the future.

b) Assume that due to unusually good weather conditions, her agricultural production increases for two periods. After the second period, her production falls back to the initial level. How would this affect her consumption, saving and work effort decisions? What is her MPC Marginal Propensity to Consume in this case?

c) Now suppose that the farmer’s grandfather, who is also a good farmer himself, passes away after a tragic accident and she inherits her grandfather’s field. This doubles her production in both periods. How does this affect her budget constraint, consumption, saving and work effort decisions? What is her MPC in this case?

Reference no: EM13201190

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