Chinese Economics(Econ 4317)

Part 2 Numerical Solution Using Excel This question is asking you to replicate the numerical exercises in the lecture notes (Page 118-121). When an expectation operator exists in the Euler equation, it is difcult to solve the problem analytically. So we seek for computer's help. The equation we want to solve using Excel (or other software) is P l P Dzlgcll wH + wt ] 1- _2_ _ _2_ _ W1 + l+r C1 101+ l+r C1 Parameters needed are given in the Page 113. In this question, we x :01 = 1, and change the income shock parameter s = U,D.1,D.2, ...,[)L9, 1. You are expected to solve this equation for 11 times given each s. 13> (a) What are the optimal consumption and saving decisions for each s. [> (b) Plot the optimal consumption decisions against the income shocks 5. [> (c) Plot the savings rate implied by optimal decisions against the income shocks 6