Question 1)

Consider an economy that behaves according to the RCK model and is at the BGP.

Suppose that at time t0 the

households learn that between time t1 and t2, where t2>t1>t0 the banks will charge additional costs to

depositors, thus making it more difficult to save. For simplicity, assume that this is equivalent to an increase in

the discount factor (rho). In other words,

increases between t1 and t2 and goes back to the original value

from time t2 onward.

Show the dynamics of c and k until the economy goes back to the steady state

Can you demonstrate this mathematically or graphically, please?