Consider the economic model in Section 18.3. The term structure of interest rates plotted in Figure 18.5 assumes agents' risk aversion is h = 104 and temporal discount is p = .1.
(a) Consider variations of risk aversion h arid the discount p, and compute the spot rate, the term spread, as well as the market price of risk. Discuss.
(b) How do the term structure of interest rates and market price of risk change with variations in the correlation between GDP growth and expected inflation and the volatility of GDP growth? Discuss.