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A Frictionless Economy Consider an economy where a representative consumer receives Y in income each period and maximizes her expected discounted utility Ett=0tln(Ct) subject to
A Frictionless Economy Consider an economy where a representative consumer receives Y in income each period and maximizes her expected discounted utility Ett=0tln(Ct) subject to the following budget constraint PtCt+Bt=PtY+(1+it1)Bt1. The price of consumption goods is denoted as Pt,Bt represents one-period nominal bonds, and it is the nominal interest rate. (a) Solve for the first order conditions of the consumer's problem. Write out the consumer's Euler equation. Note that since this is an endowment economy Ct=Ct+1=Y in all periods and this is known with certainty. (4 points) A Frictionless Economy Consider an economy where a representative consumer receives Y in income each period and maximizes her expected discounted utility Ett=0tln(Ct) subject to the following budget constraint PtCt+Bt=PtY+(1+it1)Bt1. The price of consumption goods is denoted as Pt,Bt represents one-period nominal bonds, and it is the nominal interest rate. (a) Solve for the first order conditions of the consumer's problem. Write out the consumer's Euler equation. Note that since this is an endowment economy Ct=Ct+1=Y in all periods and this is known with certainty. (4 points)
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