Last class we showed that, using the two-period model of savings with perfect capital markets (also known as efficient markets) that a fall in current income (Y) leads to a fall in savings. However, we know that currently we are seeing a fall in income and a rise in savings. Instead, examine the effects of a fall in future income (Y') on savings.
Also, examine the effect of a permanent fall in income--both Y and Y' falling--on savings. How do your results compare to only Y or Y' falling? For now, keep to analyzing the case of perfect capital markets.
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