How does it affect the current-period consumption

Reference no: EM133706730

Question: Consider a two-period economy where the credit market is imperfect. The real interest rate of lending, r1, is smaller than the rate of borrowing, r2. If the current-period output changes, use diagrams to illustrate how does it affect the current-period consump- tion? Show that the credit market imperfection can resolve the issue of excess volatility in consumption.

Reference no: EM133706730

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