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Chapter

Ch_10_Credit_Market_Imperfections.pdf

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Department
Economics
Course Code
Economics 2152A/B
Professor
Jennifer Mori

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Description
Chapter 10Pages317324 Credit Market ImperfectionsRecall the consumers budget constraintcc1r yy1r tt1rRecall further that if Ricardian equivalence holds then the timing of taxes will not matter for present consumption Suppose that the consumer is credit constrained That is the consumer cannot for some reason perhaps he has a bad credit rating borrow in the present period However he would borrow if he was not credit constrained We want to show what may happen if taxes were lowered in the present period in this situationTo set this up we start by considering two interest rates one for saving lending r1 and another for borrowing r2This is of course what happens in financial markets since banks and other lenders make their profit by making loans at a higher rate than they pay savers The diagram that illustrates this is reproduced belowCopyright2013 Pearson Canada Inc
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