Macroeconomics 5th Edition by Olivier Blanchard

Exercise 8

Borrowing constraints and aggregate capital accumulation
Continue with the setup from Problem 5, but suppose now that borrowing restrictions do not allow young consumers to borrow. If we call the sum of income and total financial wealth "cash on hand," then the borrowing restriction means that consumers cannot consume more than their cash on hand. In each age group, consumers compute their total wealth and then determine their desired level of consumption as the highest level that allows their consumption to be equal in all three periods. However, if at any time, desired consumption exceeds cash on hand, then consumers are constrained to consume exactly their cash on hand.
a. Calculate consumption in each period of life. Compare this answer to your answer to part (a) of Problem 5, and explain any differences.
b. Calculate total saving for the economy. Compare this answer to your answer to part (c) of Problem 5, and explain any differences.
c. Derive total financial wealth for the economy. Compare this answer to your answer to part (d) of Problem 5, and explain any differences.
d. Consider the following statement: "Financial liberalization may be good for individual consumers, but it is bad for overall capital accumulation." Discuss.