Problem
Interest rates and growth rates: Consider the Euler equation for consumption for log utility, equation (16.8), and answer the following questions:
(a) If the real interest rate is 5 percent and C = 1, what growth rate for consumption will households choose?
(b) What if ß = 0.95?
(c) Alternatively, suppose the long-run growth model means GDP per person will grow at a constant rate of 2 percent per year. Suppose ß = 0.95. In order for the Euler equation to hold in this case, what value must the real interest rate take?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.