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the following questions in eight sentences or fewer for (a) and four sentences or fewer for (b): (a) [6 pts] We discussed the equity premium

the following questions in eight sentences or fewer for (a) and four sentences or fewer for (b): (a) [6 pts] We discussed the equity premium puzzle, the risk-free rate puzzle, and the excess volatility puzzle in class. Pick two out of three of these puzzles, and discuss how historical consumption growth statistics contribute to these puzzles. (b) [4 pts] According to the Cochrane-Campbell habit model, what happens to ag- gregate consumption relative to the habit level of consumption during recessions? How does this affect risk aversion, expected returns, and prices during recessions? 3

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