Assume consumers with standard preferences live for two periods. They receive an income in each period (y and y′) and pay lump-sum taxes to the government (t and t′). Credit markets are not perfect, and borrowers are charged a higher interest rate than lenders. The government never defaults, and faces the lenders’ interest rate whether it borrows or lends. Which are true? a) The number of lenders is equal to the number of borrowers b) A reduction in taxes in the current period without changes in the lifetime burden of taxes increases current consumption for a lender c) A borrower is better off if there is a reduction in the interest rate paid by borrowers d) A borrower is better off if there is a reduction in the interest rate paid by borrowers, but only if the substitution effect dominates the income effect e) A reduction in taxes in the current period without changes in the lifetime burden of taxes may transform a borrower into a lender
Assume consumers with standard preferences live for two periods. They receive an income in each period (y and y′) and pay lump-sum taxes to the government (t and t′). Credit markets are not perfect, and borrowers are charged a higher interest rate than lenders. The government never defaults, and faces the lenders’ interest rate whether it borrows or lends. Which are true?
a) The number of lenders is equal to the number of borrowers
b) A reduction in taxes in the current period without changes in the lifetime burden of taxes increases
current consumption for a lender
c) A borrower is better off if there is a reduction in the interest rate paid by borrowers
d) A borrower is better off if there is a reduction in the interest rate paid by borrowers, but only if the substitution effect dominates the income effect
e) A reduction in taxes in the current period without changes in the lifetime burden of taxes may transform a borrower into a lender
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