Consider an economy in which people live for two periods in overlapping generations. When young, they are endowed with y units of a consumption good. There are Nt young agents born in each period and the population is growing at 20% per period. The consumption good can be turned into capital, which pays a one-period gross real rate of return equal to x. Capital, though, has a minimum size k, which is greater than the endowment of any single individual but smaller than the total endowment of a generation. There exists also a stock of fiat money, perfectly divisible, which grows at the rate of 5% per year. 

(a) In what sense is capital "illiquid" in this economy? Is fiat money subject to the same liquidity problem? 

(b) Describe an intermediary that might overcome the illiquidity of capital so that intermediated capital may be used to acquire consumption in the second period of life. 

(c) Suppose there is only one person in each generation who is able to run an intermediary. What is the minimum rate of return that person must offer to attract depositors? For what values of x can this person make a profit?

(d) What rate of return will be offered on deposits if there are many people in each generation able to run an intermediary?

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