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Risk Aversion and Utility Functions
This lecture covers the concept of risk aversion and utility functions, focusing on the constant relative risk aversion (CRRA) class of utility functions. It explains how high risk aversion coefficients lead to small consumption responses to price changes and discusses the Arrow-Pratt coefficient of relative risk aversion. The lecture also delves into the implications of risk neutrality and the equilibrium in consumption-based models. Additionally, it provides insights into the interaction of financial decisions, macroeconomic events, and policy decisions within the context of macrofinance.