Consider an economy where household's preference is generally presented by U(C.C.) = u(c) + Bu(c) Where...

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Consider an economy where household's preference is generally presented by U(C.C.) = u(c) + Bu(c₂) Where ß captures consumption preference. Assume that households live for two periods, t=1,2. For each period, households can either consume their income or buy bonds(b) in any time period. However, since the households will not be there to enjoy consumption in period t=3 then it will not be optimal to buy bonds in period 2. (i.e. b2=0). If the household utility function is specified as: u(c) = C/2 t = 1,2 Required i) ii) iii) iv) v) vi) Set up the consumer maximization problem. What is the rationale of including 3 in the model? Find the Euler equation in this case Determine the household's optimal choices of consumption and bonds in each time period What is the effect of the equilibrium interest rate R* given a permanent negative shock to the income representative household in each time period? To what extent does this differ from the case where u(c) = In (c) Consider an economy where household's preference is generally presented by U(C.C.) = u(c) + Bu(c₂) Where ß captures consumption preference. Assume that households live for two periods, t=1,2. For each period, households can either consume their income or buy bonds(b) in any time period. However, since the households will not be there to enjoy consumption in period t=3 then it will not be optimal to buy bonds in period 2. (i.e. b2=0). If the household utility function is specified as: u(c) = C/2 t = 1,2 Required i) ii) iii) iv) v) vi) Set up the consumer maximization problem. What is the rationale of including 3 in the model? Find the Euler equation in this case Determine the household's optimal choices of consumption and bonds in each time period What is the effect of the equilibrium interest rate R* given a permanent negative shock to the income representative household in each time period? To what extent does this differ from the case where u(c) = In (c)

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i The rationale of including in the model is to capture the households preferences for consumption represents the preference for current consumption o... View the full answer