Question Time is discrete and denoted t = 1,2,3...00. The economy is populated by a sequence of two-period-lived overlapping generations. As usual, Nt denotes the number of people born in time t and population grows at rate n, N = nNt-1. The population of initial old is given by: No. Individuals only care about their consumption when old: u(C1,t, C2,t+1) = C2,t+1. Given this utility function, we know that agents will save all of their income. By assuming this type of utility, we are abstracting from the consumption-savings decision problem, however, we will focus on the portfolio-choice problem. The young are endowed with y units of output. The young also possess an investment technology, where k units of invested at date t yields xf(kt) units at date t + 1. f' > 0, " < 0. There are only two types of government securities. One is issued by the central bank in the form of interest-bearing reserves], and the other is issued by the Treasury in the form of interest bearing debt. Both securities are nominal denominated in dollars. Let Mt denote the supply of reserves at date t, and let B denote the supply of bonds at date t. The total public debt at date t is denoted Ht Mt Bt. Reserves and bonds yield gross nominal rates of return equal to Rm and R, respectively. The central bank is delegated control over {Rtm, R, 0} where the variable 0 = Mt/Ht represents the fraction of public debt monetized by the central bank. = The fiscal authority is responsible for tax and spend decisions, which we denote T and Gt, respectively (also denominated in nominal terms). The primary deficit (surplus, if negative) Reserves are similar to money in our usual model, the difference being that agents receive interest on reserves. is given by Gt - Tt. The fiscal authority chooses the path of the primary deficit and rate at which to issue new debt, t H/H-1. The consolidated nominal government budget constraint is given by: = G + RMt1 + RB1 = T + M + Bt Tt t-1 t-1 t As usual, pt := 1/vt denote the price level. Denote by lower case variables the variable per old population: 9 = G/Nt-1, T = T/Nt-1 The Market clearing conditions imply that total demand for bonds and reserves (and total debt) equal supply: h = H/Nt. Also denote Rt-10-1R + (1 0-1) R -1. = t-1 - the government BC is equivalent to: 9t - T = (1 Rin/ui) nhi Tt = - Rut_l/ut) -1 (1) What does the RHS of the equation above represents? How does the ratio R-1/pt impact the hability of the government to run primary deficits? [3 points]