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(a) Write down the budget constraints for the households and the government in t = 1. (b) Write down the budget constraints for the households
(a) Write down the budget constraints for the households and the government in t = 1. (b) Write down the budget constraints for the households and the government in t = 2 if the government decides to repay. Write down the budget constraints for the households and the government in t = 2 if the government decides to default. Suppose the equilibrium level of debt in t = 1 is given by D1 = 1. (c) Compute the probability of default and the price of debt in t = 1, q1 and the value of debt in t = 1, q1D1. Now suppose that in t = 1, after debt is chosen everybody finds out that Y2 is uniformly distributed over [0, 1] (d) Compute the new probability of default and the price of debt in t = 1, q1 and the value of debt in t = 1, q1D1
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