Suppose there are two groups of consumers in the population, constrained and unconstrained, with equal numbers of each. The constrained consumers look like the ones in the figure to the right, while the unconstrained consumers have so much housing wealth that collateral to support any amount of borrowing they would like to do is not a problem. The government decides that it will tax each of the unconstrained consumers an equal amount in the current period and distribute this tax revenue equally among the constrained consumers as transfers. a. Take the market real interest rate as given and determine the effects of this redistribution by the government on the total demand for consumption goods in the current period and in the future period (do not try to work out the equilibrium effects; just determine what the net effect on the demand for consumption goods will be, given the real interest rate). The net effect of the redistribution by the government is demand for consumption in the future period. demand for consumption in the current period and b. What do your results tell you about fiscal policy aimed at redistributing income toward those who will tend to spend more of it? The results demonstrate that redistributing income towards consumers that tend to spend more of it causes OA. a shift in consumption in the economy from the future period to the current period. OB. an increase in consumption in the economy. OC. a decrease in consumption in the economy. OD. a shift in consumption in the economy from the current period to the future period. Limited Commitment with a Collateral Constraint y-t He y-t Current Consumption, c Q Q The consumer can borrow only with collateralizable wealth as security against the loan. As a result, the budget constraint is kinked. Initially the budget constraint is ABD and it shifts to FGH with an increase in income.
Suppose there are two groups of consumers in the population, constrained and unconstrained, with equal numbers of each. The constrained consumers look like the ones in the figure to the right, while the unconstrained consumers have so much housing wealth that collateral to support any amount of borrowing they would like to do is not a problem. The government decides that it will tax each of the unconstrained consumers an equal amount in the current period and distribute this tax revenue equally among the constrained consumers as transfers. a. Take the market real interest rate as given and determine the effects of this redistribution by the government on the total demand for consumption goods in the current period and in the future period (do not try to work out the equilibrium effects; just determine what the net effect on the demand for consumption goods will be, given the real interest rate). The net effect of the redistribution by the government is demand for consumption in the future period. demand for consumption in the current period and b. What do your results tell you about fiscal policy aimed at redistributing income toward those who will tend to spend more of it? The results demonstrate that redistributing income towards consumers that tend to spend more of it causes OA. a shift in consumption in the economy from the future period to the current period. OB. an increase in consumption in the economy. OC. a decrease in consumption in the economy. OD. a shift in consumption in the economy from the current period to the future period. Limited Commitment with a Collateral Constraint y-t He y-t Current Consumption, c Q Q The consumer can borrow only with collateralizable wealth as security against the loan. As a result, the budget constraint is kinked. Initially the budget constraint is ABD and it shifts to FGH with an increase in income.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose there are two groups of consumers in the population, constrained and unconstrained, with equal numbers of each. The constrained
consumers look like the ones in the figure to the right, while the unconstrained consumers have so much housing wealth that collateral to
support any amount of borrowing they would like to do is not a problem. The government decides that it will tax each of the unconstrained
consumers an equal amount in the current period and distribute this tax revenue equally among the constrained consumers as transfers.
a. Take the market real interest rate as given and determine the effects of this redistribution by the government on the total demand for
consumption goods in the current period and in the future period (do not try to work out the equilibrium effects; just determine what the net effect
on the demand for consumption goods will be, given the real interest rate).
The net effect of the redistribution by the government is
demand for consumption in the future period.
b. What do your results tell you about fiscal policy aimed at redistributing income toward those who will tend to spend more of it?
The results demonstrate that redistributing income towards consumers that tend to spend more of it causes
demand for consumption in the current period and
OA. a shift in consumption in the economy from the future period the current period.
O B. an increase in consumption in the economy.
OC. a decrease in consumption in the economy.
OD. a shift in consumption in the economy from the current period to the future period.
Future Consumption,
Limited Commitment with a Collateral
Constraint
D
1₁
H
y-t
Current Consumption, c
1/₂
Q
The consumer can borrow only with collateralizable wealth as security against the loan. As a result, the budget constraint is kinked.
Initially the budget constraint is ABD and it shifts to FGH with an increase in income.
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