Part C and D constraints of the representative households and of the government. Explain the role played bythe assumption that the representative households lives for only two periods and the assumptionof “no discounting".B1 (b). Show consumption c1 and cz (you can use algebraic or graphical methods). In theanswer, you should discuss whether a1 > 0 or az < 0 and provide an economic interpretation.What determine(s) the sign of a, and why?B1 (c). Explain how a credit constraint can be modeled by a, 20 and under this constrainthow does your answer to B1(b) change? How does it change if there is a banking markup suchthat the borrowing interest rate is above the interest rate of r = 0 assumed earlier? Hint: tryto relate your reasoning to the permanent income hypothesis.B1 (d). Suppose ao = Ao/P where Ao 20 denotes the savings in nominal terms. Considera supply-side shock that leads to a surprise significant increase of the price level only in period1. Should the government change its tax plan if a1 20 is imposed? Term 1 SectionConsider the two-period household-maximization model discussed inclass. The model is modified in order to look at applications including credit constraints,interest-rate markups, and taxation. A representative household lives for two periods andmaximizes utility of consumption in period 1 and in period 2. The utility is represented bylog(c) where c denotes consumption. Assuming no discounting between period 1 and period 2.The maximization problem for the representative household can be written asmax{log c + log c2}C1 + a1 = Y1 - Tị + (1+ r)aoC2 = y2 - T2 + (1+r)a1where yi and y2 denote income levels in period 1 and period 2, 71 and T2 are taxes in the twoperiods, and ao and a, denote the assets of the households in each period. ao is exogenouslygiven. Assume the interest rate r = 0, and the government can borrow or save at the sameinterest rate so that its present-value budget constraint is given by91 + 92 = T1 + T292 are exogenous government expenditures in the two periods.B1 (a). Explain what is meant by a representative household. Briefly explain the budgetwhere91and

It is mentioned to answer only parts C and D of the question. But in order to solve part C, part B…

B1 (b). Show consumption c₁ and c₂ (you can use algebraic or graphical methods). In the answer, you should discuss whether a 20 or a₁ <0 and provide an economic interpretation. What determine(s) the sign of a, and why? B1 (c). Explain how a credit constraint can be modeled by a 20 and under this constraint how does your answer to B1(b) change? How does it change if there is a banking markup such that the borrowing interest rate is above the interest rate of r = 0 assumed earlier? Hint: try to relate your reasoning to the permanent income hypothesis. B1 (d). Suppose ao = Ao/P₁ where Ao 20 denotes the savings in nominal terms. Consider a supply-side shock that leads to a surprise significant increase of the price level only in period 1. Should the government change its tax plan if a 20 is imposed?

B1 (b). Show consumption c₁ and c₂ (you can use algebraic or graphical methods). In the answer, you should discuss whether a 20 or a₁ <0 and provide an economic interpretation. What determine(s) the sign of a, and why? B1 (c). Explain how a credit constraint can be modeled by a 20 and under this constraint how does your answer to B1(b) change? How does it change if there is a banking markup such that the borrowing interest rate is above the interest rate of r = 0 assumed earlier? Hint: try to relate your reasoning to the permanent income hypothesis. B1 (d). Suppose ao = Ao/P₁ where Ao 20 denotes the savings in nominal terms. Consider a supply-side shock that leads to a surprise significant increase of the price level only in period 1. Should the government change its tax plan if a 20 is imposed?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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