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?