Let C = 100 + 0.9YDp) reflect a consumption function with YDp) representing the individual's view of permanent disposable income; let permanent income be defined by YDp) = 0.5YD-0) + 0.25YD-1) +
0)25YD-2) with YD-j) notationally representing disposable income lagged j years. If disposable income were $10,000 in each of three successive years-0, 1, and 2-then consumption in year 4 would equal
A) $9,000.
B) $9,100.
C) $10,000.
D) $10,100.
E) an amount that cannot be determined from the information provided.

Question

Quizplus · Accepted Answer

First, calculate the permanent income (YDp) using the given formula: YDp = 0.5YD-0 + 0.25YD-1 + 0.25YD-2. Since YD-0, YD-1, and YD-2 are all $10,000, YDp = 0.5*10,000 + 0.25*10,000 + 0.25*10,000 = $10,000. Then, plug YDp into the consumption function C = 100 + 0.9YDp to get C = 100 + 0.9*10,000 = $9,100.