Chapter 9 Exam question Flashcards Preview

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Flashcards in Chapter 9 Exam question Deck (7)
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1
Q

Drawinga intertemporal budget constraint with collateral

A
  1. Denote all the letters that are not stated in the question
  2. Form a budget constraint without the presence of collateral
  3. Form a future budget constaint with the collateral
  4. Form the intertemporal budget constraint through subsituting
  5. current consumption ≤ Intertemporal value of collateral (usually over interest with an addition of future income)
2
Q

Optimal choice:

A

Determine which time period is of greater value (Present or future)

3
Q

What is the collateral constraint?

A

c ≤ private disposbale income + present value of collateral

4
Q

Collateral being smaller than tax?

A

the vertical intercept/lifetime wealth will be higher under the deal than before

Present discounted value of Collateral ≤ present disposable income

5
Q

Collateral being larger than Tax

A

current value of Collateral ≥ disposable income multiplied by the interest without collateral in the previous deal

Lifetime wealth will be lower as a large chunk will be lost due to the loss of its presence

6
Q

If someone promises to sell something off?

A

It is no longer considered as collateral as there is the gurantee that it will be sold so it is removed from the intertemporal budget constraint

7
Q
A