A simplified real-business-cycle model with taste shocks. (This follows Blan- chard and Fischer, 1989, p. 361.) Consider the setup in Problem 4.8. Assume, however, that the technological disturbances (the e's) are absent, and that the instantaneous utility function is u(C)-C-0(C++). The v's are mean-zero, i.i.d. shocks.

(a) Find the first-order condition (Euler equation) relating C, and expecta- tions of C++1-

(b) Guess that consumption takes the form C = a + BK + y. Given this guess, what is Kr+ as a function of K, and v?

(c) What values must the parameters

a, , and y have for the first-order con- dition in

(a) to be satisfied for all values of K, and v?

(d) What are the effects of a one-time shock to on the paths of Y, K, and C?