In a speech in late 2011, President Obama argued that: “Probably the single greatest cause of the financial crisis and this brutal recession has been…
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Many people have difficulty borrowing as much money as they want, even if they are confident that their incomes in the future will be high enough to easily pay back the borrowed funds. For example, many students in medical school will earn high incomes after they graduate and become physicians. if the could, they would probably borrow now in order to live more comfortably while in medical school and pay the loans back out of their higher future income. Unfortunately banks are reluctant to make loans to people who currently have low incomes, even if there is a good chance their incomes will be higher in the future. If people could always borrow as much as they want to, would you expect consumption to become more or less sensitive to current income? Please explain.

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