Find out the budget constraint, Microeconomics

Assignment Help:

1. Suppose that there is a credit market imperfection because of asymmetric information. In the economy, there are N consumers. A fraction b of consumers consists of lenders, who each receive an endowment of y units of the consumption good in the current period and 0 units in the future period. A fraction of borrowers are good borrowers, who each receive an endowment of 0 units in the current period and y units in the future period. Finally, the left consumers are bad borrowers, who receive 0 units of endowment in both periods. Banks cannot distinguish between good and bad borrowers. The government sets G and G' as government spending, and each consumer is asked to pay a lump-sum tax of t in the current period and t' in the future period. The government also cannot distinguish between good and bad borrowers, but as with banks can observe endowments. The lending rate is r.

a. Write down the government's budget constraint.

b. Find out the budget constraints of good borrowers, bad borrowers, and lenders respectively.

c. Suppose that the government decrease t and increase t' in such a way that the government budget constraint holds. Does this have any effect on each consumer's decisions about how much to consume in each period and how much to save? Explain.

d. Does Ricardian equivalence hold in the economy? Explain why or why not?


Related Discussions:- Find out the budget constraint

Summary of education and economic development, Normal 0 false ...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Trends in the growth of production and productivity, Trends in the Growth ...

Trends in the Growth of Production and  Productivity: From an analysis of the trends of growth of production and productivity of agricultural sector as a whole and of differen

Explain how keynesian economics views the role of markets, Explain how Keyn...

Explain how Keynesian economics views the role of markets and government intervention in fighting business cycles. Keynesian economics believes markets frequently fail and gov

Explain the long run incremental cost, Question: (a) Long Run Incremen...

Question: (a) Long Run Incremental Cost (LRIC) is considered as the "gold standard" for setting interconnection charges. Discuss the strengths and weaknesses of the three ap

Market segmentation, what are the uncontrolled variables you think may affe...

what are the uncontrolled variables you think may affect the segment of your camera

Foreign exchange: what is hard currency, International economic relations a...

International economic relations also depend, in large calculate, on monetary =issues.  You are unlikely to accept the Turkish Lire in payment for your wages in this country, easil

Explain the link between the rate of interest and inflation, Explain the li...

Explain the link between the rate of interest and inflation. Interest can be explained as the price of money - more expensive money will lead to few loans, higher saving and as

Determine the wage contract , Assume that the employer (principle) wants it...

Assume that the employer (principle) wants its employee (agent) to work hard [You can safely assume that this maximizes the principle's expected profits from his business]. There a

Utility maximization, u=2x^2+3y^2 hence income=310 birr and price=3 birr c...

u=2x^2+3y^2 hence income=310 birr and price=3 birr calculate quntity of x and y the optimize&minmize utilityfor the given income

Consumer equilibrim, explain consumer equilibrium diagrammatically as well ...

explain consumer equilibrium diagrammatically as well mathematically by using necessary and sufficient conditions

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd