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Real interest rate if people instead are risk averse

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Consider a two-period OLG model. Population grows at a net rate of 2.5percent and the fiat money stock expands at 4.55 percent per period. Agents can holdfiat money with complete safety or to lend to someone who may never repay the loan. The chance of such a default is 10 percent. What net real interest rate will be charged tothe borrower if people are risk neutral? What is the corresponding (net) nominal rate?What can you say about the level of the real interest rate if people instead are risk averse?

Reference no: EM131267097

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