Question: QUESTION 2 from Appendix A Chapter 7 (Total: 15 marks) Consider an economy of three-period-lived people in overlapping generations. Each person is endowed with y

QUESTION 2 from Appendix A Chapter 7 (Total: 15 marks) Consider an economy of three-period-lived people in overlapping generations. Each person is endowed with y goods when young and old and nothing when middle-aged. The population of each generation born in period t is N. , where N. = n x N. . There are no assets other than loans. a. Explain how credit can be used to provide for consumption when middle-aged. Follow the model discussed in class lecture to answer this question. (5 marks) b. Point out who lends to whom and write the condition for the equality of supply and demand for loans in period t. Explain your answers. (5 marks) c. Write the budget constraints for the young, the middle-aged and the old with clear and fully explained/ well defined notations

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(a) 'Risk-less assets may be combined to form a risk-free portfolio'. Discuss this statement with reference to relevant theory and its application to the capital markets. (5 marks)

=+ d. What will the capitaloutput ratio be at the Golden Rule steady state? (Hint: For the CobbDouglas production function, the capitaloutput ratio is related to the marginal product of capital.)

=+c. Suppose that public policy raises the saving rate so that the economy reaches the Golden Rule level of capital. What will the marginal product of capital be at the Golden Rule steady state?

=+a discussion of the CobbDouglas production function, see Chapter 3.)