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6. 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 morethan their cash on hand. In each age group, consum- ers 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 con- sumption 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 an- swer 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 liberaliza- tion may be good for individual consumers, but it is bad for overall capital accumulation.” Discuss.