1 The Capitalization Method Imagine an economy with 2 people: Michael and Fredo. The national accounts data provide the following information on aggregate wealth and capital income from various assets: Value Capital Income Bonds $50 $1 Stocks $150 $10.8 Housing $250 $11.25 The following estimates for individual capital incomes are also available: Fredo Michael Bonds $0.7 $0.3 Stocks $3.6 $7.2 Housing $5 $6.25 1. What are the aggregate returns to each asset type? 2. Under the assumption that each person receives the same return on each asset type, how much wealth does each person have? 3. Using the wealth estimates from (2), construct the Lorenz curve for wealth. What is the Gini coefficient? 4. Now suppose that we can observe the actual returns each person earns: Fredo Michael Bonds Return 2% 2% Stocks Return 6% 8% Housing Return 4% 5% Repeat (2) and (3) using these rates of returns. Did the homogenous re- turns assumption cause inequality to be overestimated or underestimated in this case