Consider an economy consisting of a constant population of infinitely-lived individuals. The representative individual maximises the expected value. The instantaneous utility functionu(Ct) =Ct??(Ct+?)^2,?>0. Assume thatCis always in the range whereu?(C)is positive, and that?t's are i.i.d. taste shocks with mean zero.

Output is linear in capital:Yt=AKt. There is no depreciation; thusKt+1=Kt+Yt?Ct, and the interest rate isA. AssumeA=?.

(d)What are the effects of a one-time positive shock to?tequal to(1+A)on the paths ofYt,Kt, andCt? Interpret your results.

(e)Interpret the Covid-19 Pandemic as a (negative) taste shock, i.e. people have a lower appetite for consumption. How would you adjust your answer in part (d)?

Consider an economy consisting of a constant population of inrtelylived in- dividuals. The representative individual maximises the expected value E \"(CO i=0 (14-10)\"r p>0. The instantaneous utility function u(Ct) = C; 9 (Ct + 02, 3 > 0. Assume that C is always in the range where u' (C) is positive, and that Q's are i.i.d. taste shocks with mean zero. Output is linear in capital: Y; = AKf. There is no depreciation; thus Kt+1 = K: + Y; C5, and the interest rate is A. Assume A = p. (d) What are the effects of a one-time positive shock to Ct equal to (1 + A) on the paths of Yt, K3, and Cr? Interpret your results. (e) Interpret the Covid-19 Pandemic as a (negative) taste shock, i.e. people have a lower appetite for consumption. How would you adjust your answer in part (d)