LO 3 Suppose there are two groups of consumers in a population, constrained and unconstrained, with equal number of each. The constrained consumers look like the ones in Figure 10.5, while the unconstrained consumers do not have suicient collaterizable wealth to support the amount of borrowing they would like to do. The government decides that it will tax each constrained consumer by an equal amount in the current period and distribute the tax revenue equally among the unconstrained consumers as transfers.

(a) Take the market real interest rate as given and determine the efect of the redistribution by the government on the total demand for consumption goods in the current period and in the future period. (Only determine the net efects on the demand for consumption goods, given the real interest rate.)

(b) What do your results tell you about a iscal policy aimed at redistributing income toward those who will tend to spend more of it?

(c) Determine an eicient tax policy. This will be the tax policy that relaxes the limited commitment constraint for consumers.

(d) Discuss your results in parts

(a) and (b).