Question: solve the intertemporal Euler equation for the case that (1 + ) = 1 and (+ ) = 1 2 (+ ) 2

solve the intertemporal Euler equation for the case that (1 + ) = 1 and (+ ) = − 1 2 (+ − ̅) 2 . Show that under these two assumptions, consumption follows a random walk. Explain the role of quadratic utility at driving this result, and why it doesn't hold for general utility functions.

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SOLUTION The intertemporal Euler equation is a key equation in macroeconomics that relates consumption decisions across different time periods It is derived from the assumption of maximizing intertemp... View full answer

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