Reference no: EM131857084

This is a short excursion into a simple multiple date model. Consider an economy whose representative agent has a power utility function with a subsistence level v(y) := (y-w)1-γ /(1-γ ), withw > 0. Suppose there is no aggregate risk and endowment grows at a constant positive rate g. Assume also that w0 > w. How does the risk-free interest rate evolve over time? (Hint: Observe that, as the economy grows, consumption y more and more exceeds the subsistence level w.)