3 Partially liquid assets In the CIA model nominal and real bonds are perfectly liquid (you can exchange them for money at their face value. In real life many assets are not perfectly liquid. For example you can hold a bond that will pay B+ dollars at the end of the period, but if you need the money to consume now you can only sell it for a fraction of its face value. That is called a haircut on your asset. So instead of getting B; dollars for your bond in the secondary market you get a fraction B+, where 1. Assume now that if you try to use your bonds to finance consumption you get a "haircut" on their value of og for nominal bonds and ox for real bonds. 1. What happens to the Cash in Advance constraint of the consumer? Write it down and explain. 2. Express the constraint relative to M to get relative prices and nominal quanti- ties. 3. Write down the problem of the the consumer. Make sure to specify what the consumer is choosing and what they are taking as given. 4. Derive the first order conditions of the consumer. 5. Interpret the first order conditions with respect to nominal and real bonds. 6. Interpret the first order condition with respect to cash holdings (m). Compare this asset to nominal bonds.