Consider an economy of three-period-lived people in overlapping generations. Each person is endowed with y goods when young and nothing when middle-aged and old. The population of each generation born in period t is Nt , where Nt = n Nt?1. The young can save a part of their endowment for capital which yields return after 2 periods. The rate of return on capital is x in 2 periods time and it depreciates at the rate d every period. Loans can be exchanged between the young and the middle-aged individuals, which the borrower has to pay back to the lender in the next period.

a.Explain how credit can be used to provide for consumption when middle-aged. Explain your answer in terms of the use and source of funds for these loans.

b.Point out who lends to whom and write the condition for the equality of supply and demand for loans in period t.

c.Write the budget constraints for the young, the middle-aged and the old with clear and fully explained/ well defined notations.

d.Find an equation that represents the set of feasible stationary allocations in presence of a central planner and explain it in words.

ADDITIONAL INFORMATION:

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