ps6a_101

ps6a_101 - 74 Williamson Macroeconomics, Third Edition 3....

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74 Williamson • Macroeconomics, Third Edition 3. This problem involves a firm’s offer to provide an interest-free advance on the consumer’s income. If the consumer takes the advance, then his lifetime wealth is given by: ⎛⎞ =+ + ⎜⎟ ++ ⎝⎠ 1 1 11 y' we y x rr Therefore, provided that 0, r > the consumer should take the advance, as any increase in his lifetime wealth makes him better off.
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Chapter 8 A Two-Period Model: The Consumption-Savings Decision and Credit Markets 77 (b) The first figure above shows the case of a consumer who was a borrower before the imposition of the tax. This consumer is unaffected by the introduction of the tax. The second figure above shows the case of a consumer who was a lender before the imposition of the tax. Initially the consumer chooses point G, and then chooses point H after the imposition of the tax. There is a substitution effect that results in an increase in first-period consumption and a reduction in second-period consumption, and moves the consumer from point G to point J. Savings also fall from point G to point J. The income effect is the movement from point D to point B, and the income effect reduces both first-period and second-period consumption, and increases savings.
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ps6a_101 - 74 Williamson Macroeconomics, Third Edition 3....

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