FINE 4050 Lecture Notes - Lecture 4: Budget Constraint, Vulgate, Consumption Smoothing

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) over your life so as to obtain the highest possible total standard of living x. Recall that implicit liabilities are the present value of the minimum expenditures that you have to make in order to survive the rest of your life. These expenses are nondiscretionary, so you have no control over them the optimal consumption that you are going to derive here represents what you will consume in addition to your minimum, subsistent (i. e. , nondiscretionary) level of consumption. Assumptions for consumption smoothing: your economic net worth is completely and totally available to you to spend or invest today, you can borrow against it (all) -> no liquidity constraint b. Implies no death and no disability that will reduce the value of gross human capital or economic net worth: the valuation rate, v, used to quantify your gross human capital, gh. , is the x same as the interest rate that you pay on all your explicit debts, el x.

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