Question from Past Macroeconomics Qualifying Exam (Spring, 2005 - Question Six) at George Mason UniversityEdit
In standard micro models, consumers are constrained by price and budgets alone, in that they can buy as much as they choose at the prevailing price. In credit markets, however, consumers are typically constrained by quantity as well as by price. Thus, they confront a quantitative limit on how much credit they can obtain in addition to the interest rate with which they will be charged.
- a. Outline a model or analytical argument whereby credit rationing reflects market failure and restricts the optimal volume of market transactions
- b. Outline an alternative model or line of argument, whereby credit rationing emerges as an institutional feature of competitive markets, thus expanding the volume of market transactions.
- c. How would you appraise these alternative formulations in terms of analytical cogency and empirical strength?