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Consider the (simplified) two-period model that we learned in chapter 8. At time 1, a household takes out mortgages by the amount of m*q(m) where
Consider the (simplified) two-period model that we learned in chapter 8. At time 1, a household takes out mortgages by the amount of m*q(m) where m is the number of mortgage bonds and q(m) is the unit bond price. At time 2, the household repays m if it does not default. Suppose the bond price function q(m) is defined as follows: q(m) = 2m+4. Calculate the maximum mortgage loan that the household can take out at time 1.
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