Consider a stationary OG economy where all individuals when young have each an endowment of y units of the good and 0 when old. Every generation has the same number of individuals N and all (except the initial old) have preferences given by u(c1, c2). Assume that there is money growth according to Mt = zMt−1, t = 2, 3, ... with z > 1. The additional money is used by the government to finance a subsidy for consumption of old individuals of future generations. Hence individuals in their second period of life pay only 1 − s of any consumption level c2.
State the competitive equilibrium and carefully write down the government budget constraint.