Problem Set 6 - Topics in Macroeconomics 2 Problem Set 6 1...

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Topics in Macroeconomics 2 Problem Set 6 1. A consumer receives income y in the current period, income y' in the future period, and pays taxes and t' in the current and future period, respectively. The consumer can lend at the real interest rate r 1 The consumer is given two options. First, he or she can borrow at interest rate r 1 but can only borrow an amount x or less, where x < we-y+t . Second, he or she can borrow an unlimited amount at the interest rate r 2 , where r 2 > r 1 . Use diagrams to determine which option the consumer chooses, and explain your results. 2. Assume an economy with 1000 consumers. Each consumer has income in the current period of 50 units and future income of 60 units and pays lump-sum tax of 10 in the current period and 20 in the future period. The market real interest rate is 8%. Of the 1000 consumers, 500 consume 60 units in the future, while 500 consume 20 units in the future. (a) Determine each consumer's current consumption and current saving. t .

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