MGEC06H3 Study Guide - Midterm Guide: Government Budget Balance, Graph Labeling, Permanent Income Hypothesis

• School: UTSC
• Department: Economics for Management Studies
• Course: MGEC06H3
• Professor: Ata

Document Summary

Question-1 [28 points] answer the following short questions: [10 points] consider the fisher model of intertemporal consumption. Suppose the consumer can save at rate rs and borrow at rate rb, where rs < rb. Use graphs to show the impact of this on the consumption for borrowers and lenders (savers) as well as for an individual who is neither a borrower nor a lender. Make the argument that a borrower facing this situation may not smooth out her consumption as in the keynesian theory even though she is rational & forward-looking. Page 3 of 13 a2) since the children are expected to have a higher income, an individual who smoothes consumption across generations might want to borrow on the behalf of the children but cannot. Therefore, a tax cut will not be passed on to the kids . This implies that, debt-financed fiscal policy will be effective. Complete the following partial illustration and explain why that might be the case.