I only assigned Section 10.1 of Chapter 10, just to introduc…
I only assigned Section 10.1 of Chapter 10, just to introduce you to the notation for more than 2 time periods. The message of the PIH persists to more than two periods, of course. Consider a person making financial decisions over four periods–and think of each period as a decade. People don’t discount the future (so beta = 1), and fortunately for us the real interest rate (r) is always zero. Utility from consumption each period is square root. For each period (decade), total income is as follows: Yt = 0 Yt+1 = 100 Yt+2 = 300 Yt+1 = 200 For this person, what is optimal consumption each period?