Question
2) The representative agent lives for two periods (1 and 2) and receives exogenous incomes of y and y, respectively. The lifetime utility function
2) The representative agent lives for two periods (1 and 2) and receives exogenous incomes of y and y, respectively. The lifetime utility function is given by: V(c,c) = ln(c)+ln(c) with ( <1) being the discount factor. The agent is allowed to save or borrow at the real interest rate r, but she cannot die with debt or wealth. Assume also that the initial wealth is zero. a. Derive the intertemporal budget constraint (IBC) of the agent. b. Solve the optimization problem of the agent. In particular, show the Euler equation. C. Find the optimal value of c as a function of the parameters and the exogenous variables of the problem. d. Assume y = y2 and (1+r)=1. Is the agent saving or borrowing? e. Assume y = (1+r)y and (1+r)=1. Is the agent saving or borrowing? f. Assume y = (1+r)y and (1+r)=1. Is the agent saving or borrowing?
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