Chapter 9 Exam question

Question 1

Drawinga intertemporal budget constraint with collateral

Answer 1

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)

Question 2

Optimal choice:

Answer 2

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

Question 3

What is the collateral constraint?

Answer 3

c ≤ private disposbale income + present value of collateral

Question 4

Collateral being smaller than tax?

Answer 4

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

Present discounted value of Collateral ≤ present disposable income

Question 5

Collateral being larger than Tax

Answer 5

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

Question 6

If someone promises to sell something off?

Answer 6

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