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ps6_101 - Econ 101 Javier Birchenall Due date Tuesday...

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Econ 101 Javier Birchenall Due date: Tuesday, November 24, 2009 Problem set 6: Ricardian equivalence (as loans) and the budget of consumers The following problem set includes concepts related to class and some not discussed in detail such as the role of borrowing constraints. In particular, the concept of Ricardian equivalence and changes in the budget constraint. Plan to spend 6 hours (maybe more) on these questions. Please return the problem set on time (next Tuesday during class), remember you have the chance to miss one and only one, use it wisely. If you have any problems regarding the questions please contact me or your TA immediately. Good luck! Please remember to show your work and write your section. I. (45%) Ricardian equivalence Suppose in our two-period model of the economy that the government, instead of borrowing in the current period, runs a government loan program. That is, loans are made to consumers at the market real interest rate r
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