Derive the specific euler equation implied by the preference

Reference no: EM13243524

The tangency condition implies the Euler equation MU(Ct) = (1+r1 ) MU (Ct+1).
Now assume the marginal utility functions are
MU (Ct) =βtct-1/α (1)
where α is the intertemporal elasticity of substitution(IES)

(a) Derive the specific Euler equation implied by the preferencesin (1).

(b) If the IES is very small (i.e., if α → 0), what happens to the relationship between consumption growth and real interest rates?

Reference no: EM13243524

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