According to Irving Fisher’s two period model, if the consumers face borrowing constraint, the first-period consumption cannot exceed first-period income True False
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According to Irving Fisher’s two period model, if the consumers face borrowing constraint, the first-period consumption cannot exceed first-period income True False
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- Suppose that a consumer/investor has an initial endowment only for the current period, which is Eo =450. She may consume today or in the next period only (two-period model). The interest rate for borrowing and lending in the capital market is 5% (a)Depict the budget constraint for the investor in an inter-temporal consumption diagram! What is the maximum amount the consumer is able to consume in the next period? (b)The consumption preferences of the consumer/investor are best described by a square root function, defined over current and future consumption. What is his optimal consumption plan? Show your calculations! Depict the results in appropriate diagram. Which amount is invested in the capital market?Consider a two-period consumption saving model and let ci and c2 denote the first and second period consumption, respectively. Assume that the interest rate at which the consumer may lend or borrow is 10%. Suppose that a consumer's utility function is u (C1, c2) = c1 + 20 c2. The consumer first period income is I1 = $100 and the present value of her income stream is $330. (a) What is the optimal consumption stream (consumption bundle) of this consumer? (b) Is this consumer borrower or lender? How much does she borrow or lend? (c) What is the effect of a reduction of the interest rate to 5% on the consumer's optimal first-period saving? (Make sure to take into account the effect of the decline in the interest rate on the present value of the consumer's income stream.)Find out the optimal consumption path, taking the interest rate as given and then to find out the equilibrium interest rate that will eliminate demand for saving and investment, taking the consumption path as given (Chapter 11 of GLS). Both times, the utility function will be the same: U = ln(ct) + 0.9ln(ct+1) So, the future counts 90% as much as the present. In Part 1, income each period is 100, and the interest rate is 20%. In Part 2, consumption in each period is 100–in other words, income each period is 100, but income isn’t storable (it’s “manna”), so you have to consume it or lose it. Answer the following question. What is the equilibrium interest rate between these two periods? If the equilbrium interest rate were lower than that level, would that create a surplus or a shortage?
- How does savings change with changes in y1? Provide some intuition behind this result.Consider the two-period household-maximization model discussed inclass. The model is modified in order to look at applications including credit constraints,interest-rate markups, and taxation. A representative household lives for two periods andmaximizes utility of consumption in period 1 and in period 2. The utility is represented bylog(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written asmax{log c1 + log c2}c1 + a1 = y1 − τ1 + (1 + r)a0c2 = y2 − τ2 + (1 + r)a1where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the twoperiods, and a0 and a1 denote the assets of the households in each period. a0 is exogenouslygiven. Assume the interest rate r = 0, and the government can borrow or save at the sameinterest rate so that its present-value budget constraint is given byg1 + g2 = τ1 + τ2where g1 and g2 are exogenous government expenditures in the two…Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as a) Explain what is meant by a representative household. Briefly explain the budget constraints of the representative households and of the government. Explain the role played by the assumption that the representative households lives for only two periods and the assumption of “no discounting”.
- In the Euler's Equation representation of the PI-LC model of consumption in two time periods, if the real interest rate is higher than the consumer impatience parameter, O the current level of consumption is lower than the future level of consumption O the current level of savings is equal to the future level of savings O the the current level of consumption is equal to the future level of consumption O the current level of consumption is higher than the future level of consumptionConsider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as Max{logc1+logc2} c1+a1=y1-τ1+(1+r)a0 c2=y2-τ2+(1+r)a1 where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the two periods, and a0 and a1 denote the assets of the households in each period. a0 is exogenously given. Assume the interest rate r = 0, and the government can borrow or save at the same interest rate so that its present-value budget constraint is given by where g1 and g2 are exogenous government expenditures in the two periods. (b). Show…Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as max{log c1 + log c2} c1 + a1 = y1 − τ1 + (1 + r)a0 c2 = y2 − τ2 + (1 + r)a1 where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the two periods, and a0 and a1 denote the assets of the households in each period. a0 is exogenously given. Assume the interest rate r = 0, and the government can borrow or save at the same interest rate so that its present-value budget constraint is given by g1 + g2 = τ1 + τ2 where g1 and g2 are exogenous government expenditures…
- Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as max{log c1 + log c2} c1 + a1 = y1 − τ1 + (1 + r)a0 c2 = y2 − τ2 + (1 + r)a1 where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the two periods, and a0 and a1 denote the assets of the households in each period. a0 is exogenously given. Assume the interest rate r = 0, and the government can borrow or save at the same interest rate so that its present-value budget constraint is given by g1 + g2 = τ1 + τ2 where g1 and g2 are exogenous government expenditures…In the discussion of the life-cycle hypothesis, income is assumed to be constant during the period before retirement. For most people, however, income grows over their lifetimes. How does this growth in income influence the lifetime pattern of consumption and wealth accumulation shown in Figure 17-12 under the following conditions? Consumers can borrow, so their wealth can be negative. Consumers face borrowing constraints that prevent their wealth from falling below zero. Do you consider case (a) or case (b) to be more realistic? Why?what is unrealistic about friedman consumption theory ?