CHAPTER 3: ECONOMIC CIRCUMSTANCES IN FINANCIAL MARKETS

Question 1

Endowment examples

Answer 1

Time + skill
Financial assets (cash)
Ability to earn future income when we borrow.

Question 2

Consumers choice set

Answer 2

Set of all consumption bundles that are affordable

Question 3

Worker choice set

Answer 3

1) consumption goods
2) hours of labour

Question 4

Ieisure hours being sold for an hourly wage implies that the opportunity cost of

Answer 4

An hour of lesiure is the wage (endowment)

Question 5

We model workers choosing between

Answer 5

Leisure and consumption

Question 6

L
Fancy l
C

Answer 6

L = leisure hours per week available
Fancy l = leisure hours per week taken
C = dollars of weekly consumption

Question 7

Equations

Answer 7

C = w(L - fancy l)

WL = C + w fancy l

Question 8

Savings and borrowing decisions involve a trade -off between

Answer 8

Present and future consumption

Question 9

Saving means

Answer 9

Giving up consumption now in order to buy an asset we can sell later to consume in the future

Question 10

Borrowing is

Answer 10

Selling a future asset (future earnings) in order to consume now

Question 11

Intertemporal Budget Constraint

Answer 11

The trade-off an individual faces between consumption today and consumption in the future

Question 12

Intertemporal budget constraint equation

Answer 12

• (I + r)

(1+r)C1 + C2 = (1+r)e1 + e2

Question 14

Intertemporal budget choice set

Answer 14

Given r, c2 (consumption in the future), is no greater than accumulated savings + future earnings.

C2 < (1+R) (e1 - c1) + e2

Question 15

Combining worker and saver models together

Answer 15

C2 = (1+r)w(L-fancyl) - (1+r)e1