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1. What does the Keynesian consumption function imply about the average propensity to consume of a rich versus a poor country? Which country should have a higher average propensity to consume? How can you explain the relatively low levels of saving of rich countries?

2. In May 2010, the size of Greece’s budget deficit increased its probability of default and triggered a crisis across the Eurozone. To decrease the budget deficit, the Greek government proposed many measures. A few of them involved decreasing pension and/or benefits payments to retirees. Use the life-cycle hypothesis to evaluate the impact of an unexpected decrease in your income after you retire.

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