Week 8

Question 1

What is assymetric info?

Answer 1

Secrecy between people

Question 2

What is limited commitment?

Answer 2

People don’t keep promises

Question 3

How do we construct a budget constraint? Include tax:

Answer 3

Consumption in all periods has to be equal to income

c + c’/(1+r) = (y-t) + (y’-t’)/(1+r)

R is different depending on if you are a lender or borrower
The rates for borrowers > rates for lenders because banks hedge ris against people with bad credit

Question 4

What is Ricardian equivalence?

Answer 4

Theory suggesting that when a government borrows money to finance increased spending, this does not boost overall economic demand.
People anticipate increase in taxation by saving more