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Unformatted text preview: the start of the f rst period that is valued at P = 20 . Throughout we shall assume that the agent is not willing to resell the house, because she wants to leave it as a bequest to her children. However, she can use it as collateral for up to a fraction x ≤ 1 of its value. The agent’s income is 20 in the f rst period, 60 in the second, and 10 in the third period. (a) Compute the agent’s f rst period consumption, assuming that banks are willing to lend only up to xP of the house value. What is the critical value of x that will allow the agent to achieve perfect consumption smoothing? (b) Assume that x = 1 . Show that a decrease in the price of the agent’s house to P = 15 will leave the agent’s consumption plans una f ected. (c) Assume that x = 1 . Suppose that the price of the house drops to P = 8 . Compute the drop in the agent’s f rst period consumption. 1...
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This homework help was uploaded on 04/15/2008 for the course ECON 1110 taught by Professor Tedlochtemzelides during the Spring '08 term at Pittsburgh.
 Spring '08
 TedLochTemzelides
 Macroeconomics

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