Show that the Ricardian Equivalence does not necessarily hold if the assumption of perfect credit markets is violated which means the consumers can be liquidity constrained (e.g. due to transaction cost). More precisely, demonstrate the problem in a situation when the interest rate depends on whether the household lends or borrows in the first period. Lenders get an interest rate is rL, while borrowers face an interest rate rB, with rB > rL. Government can also borrow at the lower interest rate.
Show that the Ricardian Equivalence does not necessarily hold if the assumption of perfect credit markets is violated which means the consumers can be liquidity constrained (e.g. due to transaction cost). More precisely, demonstrate the problem in a situation when the interest rate depends on whether the household lends or borrows in the first period. Lenders get an interest rate is rL, while borrowers face an interest rate rB, with rB > rL. Government can also borrow at the lower interest rate.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter21: Supply Chains And Working Capital Management
Section: Chapter Questions
Problem 6MC
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Show that the Ricardian Equivalence does not necessarily hold if the assumption of perfect credit markets is violated which means the consumers can be liquidity constrained (e.g. due to transaction cost). More precisely, demonstrate the problem in a situation when the interest rate depends on whether the household lends or borrows in the first period. Lenders get an interest rate is rL, while borrowers face an interest rate rB, with rB > rL. Government can also borrow at the lower interest rate.
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