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i) if taxes are levied as a lump sum ii) if taxes are levied as a proportionate tax on labour income (for simplicity you can assume that in this case the amount of tax levied determines the amount of spending) b) Now assume a 2 period model in which the consumer solves the intertemporal consumption problem (you may ignore the labour supply decision in this case, and treat income in each period as exogenous to the consumer). i) Show diagramatically the case of Ricardian Equivalence ii) Discuss the implications of borrowing constraints for this result, illustrating your answer where relevant using the two period model. c) In part a), section i) you should have found that a rise in government spending boosts GDP. Comment on the contrast between this effect and the "Keynesian Multiplier", relating your analysis to earlier answers where relevant.

i) if taxes are levied as a lump sum ii) if taxes are levied as a proportionate tax on labour income (for simplicity you can assume that in this case the amount of tax levied determines the amount of spending) b) Now assume a 2 period model in which the consumer solves the intertemporal consumption problem (you may ignore the labour supply decision in this case, and treat income in each period as exogenous to the consumer). i) Show diagramatically the case of Ricardian Equivalence ii) Discuss the implications of borrowing constraints for this result, illustrating your answer where relevant using the two period model. c) In part a), section i) you should have found that a rise in government spending boosts GDP. Comment on the contrast between this effect and the "Keynesian Multiplier", relating your analysis to earlier answers where relevant.

Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter25: The Keynesian Perspective
Section: Chapter Questions
Problem 20CTQ: Suppose the economy is operating at potential GDP when It experiences an increase in export demand....
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11. (NB: This question should be answered primarily using words and diagrams, and with minimal use of algebra). a) Assume that labour supply is chosen to maximise the utility of the representative consumer in the "one-period model" of the Williamson textbook. Assume an increase in government spending, with a balanced budget. Contrast and explain the effects this will have on aggregate output, consumption, and employment, i) if taxes are levied as a lump sum ii) if taxes are levied as a proportionate tax on labour income (for simplicity you can assume that in this case the amount of tax levied determines the amount of spending) b) Now assume a 2 period model in which the consumer solves the intertemporal consumption problem (you may ignore the labour supply decision in this case, and treat income in each period as exogenous to the consumer). i) Show diagramatically the case of Ricardian Equivalence ii) Discuss the implications of borrowing constraints for this result, illustrating your answer where relevant using the two period model. c) In part a), section i) you should have found that a rise in government spending boosts GDP. Comment on the contrast between this effect and the "Keynesian Multiplier", relating your analysis to earlier answers where relevant. 4 of 9
Transcribed Image Text:11. (NB: This question should be answered primarily using words and diagrams, and with minimal use of algebra). a) Assume that labour supply is chosen to maximise the utility of the representative consumer in the "one-period model" of the Williamson textbook. Assume an increase in government spending, with a balanced budget. Contrast and explain the effects this will have on aggregate output, consumption, and employment, i) if taxes are levied as a lump sum ii) if taxes are levied as a proportionate tax on labour income (for simplicity you can assume that in this case the amount of tax levied determines the amount of spending) b) Now assume a 2 period model in which the consumer solves the intertemporal consumption problem (you may ignore the labour supply decision in this case, and treat income in each period as exogenous to the consumer). i) Show diagramatically the case of Ricardian Equivalence ii) Discuss the implications of borrowing constraints for this result, illustrating your answer where relevant using the two period model. c) In part a), section i) you should have found that a rise in government spending boosts GDP. Comment on the contrast between this effect and the "Keynesian Multiplier", relating your analysis to earlier answers where relevant. 4 of 9
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