Consider a two-period small open endowment economy with free capital mobility. Households live for one period. The endowment is 10 in both periods. The utility function of households living in period 1 is lnC1 and that of households living in period 2 is lnC2. The government lives for 2 periods and has access to the world financial market, where the interest rate is 10 percent r = 0.1. Government spending is 2 in both periods (G1 =G2 = 2). The government levies lump-sum taxes in periods 1 and 2, denoted T1 and T2, respectively. Finally, assume that households and government start their lives with no debts or assets. (a) Suppose that T2 = 1. Calculate T1. (b) What is the primary fiscal deficit in period 1?
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Consider a two-period small open endowment economy with free capital mobility. Households live for one period. The endowment is 10 in both periods. The utility function of households living in period 1 is lnC1 and that of households living in period 2 is lnC2. The government lives for 2 periods and has access to the world financial market, where the interest rate is 10 percent r = 0.1. Government spending is 2 in both periods (G1 =G2 = 2). The government levies lump-sum taxes in periods 1 and 2, denoted T1 and T2, respectively. Finally, assume that households and government start their lives with no debts or assets.
(a) Suppose that T2 = 1. Calculate T1.
(b) What is the primary fiscal deficit in period 1?
(c) Calculate consumption in periods 1 and 2.
(d) Calculate the trade balance and the current account in period 1.
(e) Suppose now that the government does not have access to lump-sum taxes (T1 = T2 = 0). Instead, the government levies a proportional tax on consumption at the rates τ1 and τ2 in periods 1 and 2, respectively. Suppose that τ2 = 0.1. Calculate τ1, C1, C2.
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