N2

Consider the general equilibrium model with credit market imperfection from the lecture notes, change the borrowing constraint: 1+ to the following collateral constraint: 1+. Assume that the borrowers in the population each own quantity of housing H, and that the price of houses is p, which is exogenous. Borrowers cannot sell their houses in the current period. Assume that lenders have no houses. a. Determine the market interest rate r, and the consumption of borrowers and of lenders in equilibrium, in the current and future periods. (Your solution should be in terms of N, B, B', p and y) b. What effects does an increase in the price of housing, p, have on consumption of lenders and borrowers in the current and future periods, and on the market interest rate? Does this make lenders worse off or better off? Are borrowers better off or worse off? c. Explain your results in part (b).