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Question: Suppose there is a credit market imperfection due to limited commitment. As in the setup with collateralizable wealth we examined in this chapter, each consumer has a component of wealth which has value pH in the future period, cannot be sold in the current period, and can be pledged as collateral against loans. Suppose also that the government requires each consumer to pay a lump-sum tax t in the current period, and a tax t œ in the future period. Also suppose that there is limited commitment with respect to taxation as well. That is, if a consumer refuses to pay his or her taxes, the government can seize the consumer's collateralizable wealth, but cannot confiscate income (the consumer's endowment). Assume that if a consumer fails to pay off his or her debts to private lenders, and also fails to pay his or her taxes, the government has to be paid first from the consumer's collateralizable wealth. (a) Show how the limited commitment problem puts a limit on how much the government can spend in the current and future periods. (b) Write down the consumer's collateral constraint, taking into account the limited commitment problem with respect to taxes. (c) Suppose that the government reduces t and increases t œ so that the government budget constraint continues to hold. What will be the effects on an individual consumer's consumption in the present and the future? Does Ricardian equivalence hold in this economy? Explain why or why not
Why does the assumption of independence of risks matter in insurance What would happen to premiums if the probabilities of houses burning were positively correlated Can you think of a situation where they might be negatively correlated
How were GDP, inflation, and unemployment affected during the recession, and how does the model show this? What monetary policies and fiscal policies were implemented during the recession? How did the recession affect U.S. trade relations and the U.S..
How a rise in the price of sugar affects the market for sodas - How federal government budget deficits affect interest rates.
The credit union will have $2.3 million available for investment during the coming year. State laws and credit union policies impose the following restrictions on the composition of the loans and investments.
PC-World is a U.S. manufacturer of personal computers. The CEO is looking at opportunities for off-shore production. The selection of the country where PC-World will establish a production facility will depend on the following two factors:
Use the following data for a pure monopoly to calculate the firm's-its profit-maximizing output level and produce price;
Compare the conditions necessary for efficiency for a pure public good with a private good.
most religions argue that individuals should not fully exploit market positions by charging individuals the maximum
A rural utility company provides standby power to pumping stations using diesel-powered generators. An alternative has arisen whereby the utility could use natural gas to power the generators, but it will be a few years before the gas is available..
Suppose that the restaurant industry is perfectly competitive. All producers have identical cost curves, and the industry is currently in long-run equilibrium
Can you tell whether this firm is in a competitive industry and if the industry is in a long-run equilibrium?
Illustrtae what does the agent choose if the terms are worse than actuarially fair.
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