A household has a two -period planning horizon where consumption in the two periods are bounded by the intertemporal budget constraint, c1 + c2 /(1 +r) = y1 + y2 /(1 +r)
Suppose that y 1 > y 2 by a large margin and that the household fa ces a liquidity constraint with which c t ≤ y t for t =1,2. Now, suppose that y 1 increases by a given amount d y and that y 2 decreases by the amount dy /(1+r). What is the MPC in period 1? Explain