Use the following two-period model to answer the following questions: U (C, C) = log C...

Transcribed Image Text:

Use the following two-period model to answer the following questions: U (C₁, C₂) = log C₁ + log C₂. subject to the life-time budget constraint C₁ + C₂ 1+r₁ = Q₁ + Q2 1+r₁ Assume B₁ < 0, i.e., consumers borrow in the first period. Suppose now there is a rise in interest rate on international credit market, r₁ increases in period 2 to *1 + Δ. Show how do the second period consumption and trade balance change with the rise in interest rate. Explain. Use the following two-period model to answer the following questions: U (C₁, C₂) = log C₁ + log C₂. subject to the life-time budget constraint C₁ + C₂ 1+r₁ = Q₁ + Q2 1+r₁ Assume B₁ < 0, i.e., consumers borrow in the first period. Suppose now there is a rise in interest rate on international credit market, r₁ increases in period 2 to *1 + Δ. Show how do the second period consumption and trade balance change with the rise in interest rate. Explain.

Answer rating: 100% (QA)

Impact of Increased Interest Rate on Consumption and Trade Balance Model UC1 C2 log C1 log C2 C1 C2 ... View the full answer