An economy consists of a two-period lived consumer who values consumption and leisure in both periods and has h units of time in both periods; a two-period lived representative firm which is owned by the consumer; and a government. Let us assume that government plans to spend G and G’ in the current and future period, and its tax revenue of T and T’ levied on the representative consumer is such that its lifetime budget constraint holds. Production functions at the representative firm are Y=zF(K,N) and Y'=z'F(K',N') in the current and future period respectively. Suppose also that the economy is initially in equilibrium. Consider the following two scenarios, and explain clearly how each affects equilibria in the current labour and goods market, taking care to explain clearly the impact on the decision made in the current period by the representative consumer and representative firm. Scenario 1 At the beginning of the current period, the government announces that it will cut the amount of government expenditure (only) in the current period, by exactly delta(G), where delta(G)
An economy consists of a two-period lived consumer who values consumption and leisure in both periods and has h units of time in both periods; a two-period lived representative firm which is owned by the consumer; and a government. Let us assume that government plans to spend G and G’ in the current and future period, and its tax revenue of T and T’ levied on the representative consumer is such that its lifetime budget constraint holds. Production functions at the representative firm are Y=zF(K,N) and Y'=z'F(K',N') in the current and future period respectively. Suppose also that the economy is initially in equilibrium.
Consider the following two scenarios, and explain clearly how each affects equilibria in the current labour and goods market, taking care to explain clearly the impact on the decision made in the current period by the representative consumer and representative firm.
Scenario 1
At the beginning of the current period, the government announces that it will cut the amount of government expenditure (only) in the current period, by exactly delta(G), where delta(G)<G.
Scenario 2
At the beginning of the current period, the productivity is expected to decrease in the future period from z1 to z2.
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