ECON 2HH3- Midterm Exam Guide - Comprehensive Notes for the exam ( 27 pages long!)
11 Oct 2017
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Chapter 10: credit market imperfections credit frictions, financial crises, and social. In perfect credit markets consumers would not be affected by a change in taxes. Difference between borrowing and lending rates in real life lead to more complicated lifetime budget constraint. Banks exist because can manage risk by diversifying between bad and good borrowers. Decrease in creditworthy borrowers: default premium on lending interest rate increases when number of creditworthy borrowers decreases, borrowers face higher loan rates, budget constraint shifts in, consumption falls for all borrowers, borrowers decrease borrowing. Extent to which borrower can borrow is constrained by value of collateral. If price of collateral falls then quantity of lending and consumption declines. Social security programs: government-provided means for saving for retirement. Problems with fully funded: allow public pension funds to be run inefficiently because of political interference, subject to moral hazard managers of retirement accounts take on too much risk since they are insured.
