Assume consumers with standard preferences live for two periods. They receive an income in each period (y and y′) and pay lump-sum taxes to the government in each period (t and t′ ). The credit market is perfect, i.e. every borrower repays its debts. Let us suppose that the government increases government spending in the first period (G increases, G′ does not change). At the same time the government reduces taxes in the first period (t< t ) and increases taxes in the second period (t′ > t′ ) in such a way that the new 21 21 government intertemporal budget constraint with the new government spending level is satisfied. After these policy changes: a) Borrowers will definitely borrow more b) Lenders will definitely save more c) Nothing changes as Ricardian equivalence holds. d) Current consumption will be lower e) Current consumption will be the same Choose all correct options
Assume consumers with standard preferences live for two periods. They receive an income in each period (y and y′) and pay lump-sum taxes to the government in each period (t and t′ ). The credit market is perfect,
i.e. every borrower repays its debts. Let us suppose that the government increases government spending in the first period (G increases, G′ does not change). At the same time the government reduces taxes in the
first period (t< t ) and increases taxes in the second period (t′ > t′ ) in such a way that the new 21 21
government intertemporal budget constraint with the new government spending level is satisfied. After these policy changes:
a) Borrowers will definitely borrow more
b) Lenders will definitely save more
c) Nothing changes as Ricardian equivalence holds.
d) Current consumption will be lower
e) Current consumption will be the same
Choose all correct options
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