2. Dynamics of the borrowing-constrained overlapping generations model. Take the model with credit constraints analyzed in section

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2. Dynamics of the borrowing-constrained overlapping generations model. Take the model with credit constraints analyzed in section 7.2.2.3. Assume that the parame- ters of the model are such that the economy's autarky interest rate r^ equals the world interest rate r, in which case r=r as well. (Thus, when the country becomes inte- grated into world capital markets, the credit constraint is not binding.) At time 0, there is an unanticipated permanent productivity rise, so that y = Ak where A1 (given that A = 1 initially as in the text). Analyze the path of the economy. Does the economy eventually return to a long-run steady state with "=r?

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