Suppose the credit market has limmited commitment friction.

The questions are connected. 1. In the standard two-period model in Chapter 9, suppose the government issues treasury bonds of value B > 0 and collect lumpsum tax T > 0 in the rst period. Is current consumption increasing or decreasing in B? Is real interest rate increasing or decreasing in B? Explain using words, equations and diagrams. 2. Suppose the credit market has limmited commitment friction. All consumers are identical and has private desposable income Y T in the current period and Y' T' in the future period. Each consumer is also endowed with a house that is worth A units of future consumption goods in the future period which can be used as a collateral for borrowing. (a) Draw the lifetime budget constraint. Clearly label the axises, the coordinates of the intercepts, the endowment point, and the kinks [if there is any]. (h) Does your conclusion for Question 1 hold here? 3. Suppose there are two types of consumers with a good borrowers and (1 a) bad borrowers. The good borrowers are identical, and always repay their loans. Banks issue deposits that pay a real interest rate T1 and make loans to borrowers. Banks cannot tell the difference between a good borrower and a bad one if they ask for loans of the same size. Suppose the good borrowers want to borrow L 2 1f\"- (a) How much will the bad borrowers borrow from the bank? Please briey explain. (b) Determine the interest rate on loans, r2, made by banks. Is r2 higher or lower than n? (c) How will the interest rate on loans change if each borrower has more collateral