Answer to Question #66318 in Macroeconomics for boset00

Question

consider a neighbouring economy with a better weather than the present economy . individuals in this economy have the same utility function as those of the present economy. However, each of their trees bear 2.75 fruits for sure in period 1.
-Is the equilibrium price of riskless bond (q) the same in both econonmies? why or why not.
- Fed up with the bad weather, some individuals cut down their trees and move to this neighbouring economy in period 0 . they only bring d0 fruits with them. what will happen to the equilibrium price of riskless bond (q0) in this economy after their arrival ? explain .

Answer 1

Consider a neighbouring economy with a better weather than the present economy . Each of their trees bear 2.75 fruits for sure in period 1.
- The equilibrium price of riskless bond (q) is the same in both economies, because they are risk free and don't depend on weather.
- Fed up with the bad weather, some individuals cut down their trees and move to this neighbouring economy in period 0. They only bring d0 fruits with them. Then the equilibrium price of riskless bond (q0) in this economy after their arrival will not change too, because it won't influence any risks.