Consider the following economy. Individuals are endowed with y units of the consumption good when young and nothing when old, but would like to consume in both periods. People face a lump-sum tax of t goods when young and a rate of expansion of the fiat money supply of z > 1. The tax and the expansion of the fiat money stock are used to finance government purchases of g goods for each old person in every period. There are N people in every generation (constant population). (a) Find the individualís budget constraints when young and when old. Combine them to derive the individualís lifetime budget constraint. Explain the results. (b) Find the government's budget constraint. Explain each component. (c) Find the feasible set. Explain what is the role of z, t and g in it, and why. (d) Now consider instead the case where the lump-sum tax of t goods is levied on the old and used to finance a transfer of g goods to the young. Derive the new government budget constraint and feasible set. Explain the results.
Consider the following economy. Individuals are endowed with y units of the consumption good when young and nothing when old, but would like to consume in both periods. People face a lump-sum tax of t goods when young and a rate of expansion of the fiat money supply of z > 1. The tax and the expansion of the fiat money stock are used to finance government purchases of g goods for each old person in every period. There are N people in every generation (constant population).
(a) Find the individualís budget constraints when young and when old. Combine them to derive the individualís lifetime budget constraint. Explain the results.
(b) Find the government's budget constraint. Explain each component.
(c) Find the feasible set. Explain what is the role of z, t and g in it, and why.
(d) Now consider instead the case where the lump-sum tax of t goods is levied on the old and used to finance a transfer of g goods to the young. Derive the new government budget constraint and feasible set. Explain the results.
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