suppose that permanent income ypt is calculated

Question

Suppose that permanent income, YP_(t) is calculated as the average of disposable income (YD_t) over the past 5 years, that is:

YP_(t) = 0.2(YD_t + YD_t-1 + YD_t-2 + YD_t-3 YD_t-4)

Suppose further that consumption is given as

C = 0.9 YP_(t)

a.  If you earned $20,000 per year for the past 10 years, what is your permanent income?

b.  Suppose that next year, (t + 1), you earn $30,000.  What is you new permanent income?

c.  What is your consumption this year and next year (i.e., C_t and C_{t + 1})?

d.  What is your short-run (1-year) and long-run MPC?