1 Borrowing Limits For this question, use the two-period model of Chapter 9. A consumer receives income y in the current

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1 Borrowing Limits For This Question Use The Two Period Model Of Chapter 9 A Consumer Receives Income Y In The Current 1 (70.07 KiB) Viewed 44 times

1 Borrowing Limits For This Question Use The Two Period Model Of Chapter 9 A Consumer Receives Income Y In The Current 2 (22.63 KiB) Viewed 44 times

1 Borrowing Limits For this question, use the two-period model of Chapter 9. A consumer receives income y in the current period, income y in the future period, and pays taxes of t and t' in the current and future periods, respectively. The consumer can borrow or lend at the real interest rate r. This consumer faces a constraint on how much he or she can borrow, much like the credit limit typically placed on a credit card account. That is, the consumer cannot borrow more than x. Use diagrams to determine the effects on the consumer's current consumption, future consumption, and savings of an increase in z, and explain your results. 2 A Government Loan Program For this question, use the two-period model of Chapter 9 as a baseline. Assume that the government, instead of borrowing in the current period, runs a government loan program. That is, loans are made to consumers at the market real interest rate r, with the aggregate quantity of loans made in the current periods denoted by L. You can let l be an individual consumer's loan from the government. Government loans are financed by lump-sum taxes on consumers in the current period. Assume government spending is zero in the current and future period (G= 0 and G' = 0). In the future period, when the loans are repaid by consumers, the government will rebate this amount back as lump-sum transfers to consumers. (a) Write down the government's current-period budget constraint and future period bud- get constraint. (b) What is the lifetime budget constraint for the government? (c) What is the lifetime budget constraint of the consumer? (d) Show that the size of the government loan program, L. has no effect on current con- sumption or future consumption for each individual consumer and that there is no effect on the equilibrium real interest rate.
3 3 The Price of Capital Let us modify the model the Real Intertemporal Model with Investment of Chapter 11. Assume that any capital the firm has remaining at the end of the period can be sold at the price ph (in the baseline model we assumed that capital could be sold at a price of 1, in terms of consumption goods). (a) Determine how this changes the optimal investment rule for the firm. (b) Suppose we interpret as the firm's stock price. If increases, what effect does this have on the firm's optimal investment schedule? What does this imply about the relationship between investment expenditures and stock prices?