SOLVED

11) When the borrowing constraint is binding, ________. A) wealth is zero B) current consumption is lower than future consumption C) future consumption is lower than current consumption D) consumption smoothing is not possible 12) When the borrowing constraint is binding, ________. A) wealth is zero B) C1 = Y1 C) C2 = Y2 D) current and future consumption are equal 13) ________ might cause the borrowing constraint to become non-binding, even though the consumer still cannot borrow. A) an increase in future (expected) income B) an increase in the real interest rate C) a decrease in current income D) a decrease in the real interest rate 14) For many consumption activities — skiing, for example — the activity becomes more enjoyable as the consumer becomes more experienced. Assuming that “training consumption” is inexpensive relative to “proficient consumption,” do such activities make it more or less likely that a borrowing constraint will be binding? 15) Use the intertemporal budget constraint — equation (2) — to explain how an increase in the real interest rate causes two distinct effects, an income effect and a substitution effect, and how those effects differ depending on whether the consumer is a saver or a borrower. 16) During the 2007-2009 financial crisis, many households found themselves with negative wealth (debts to repay) and a binding borrowing constraint. Describe the income and substitution effects of a decrease in the real interest rate. 17) How might consumers for whom the borrowing constraint is binding benefit from access to relatively expensive forms of credit (e.g., pawn shops and “payday” loans)?