ECON 4721, Money & Banking

Reference: Modeling Monetary Economics (2016, Fourth Edition, Cambridge University Press) by Bruce Champ, Scott Freeman and Joseph Haslag.

Question 3 - Portfolio Choice. Let's focus now on the problem of a single agent our OLG economy. As usual, she receives an endowment y = 5 when young and nothing when old. The agent has the option to buy 2 assets in and b in order to save for the future (there is no money). Asset a and 3) rates of return are '11,, :r'b respectively. She has a typical log utility: u(cl,c:2) = log(cl) + 309(02). In all cases below, assume the agents may shortsell their assets ((1,?) can be negative). 1. State the agent's budget constraints. _ 2. Suppose that rd 2 3, n, = 4. What is the optimal demand for assets :1 and b? 3. What is the condition on 9\