Problem 1. Ramsey (a) Rewrite and explain the main equilibrium equations of the Ramsey model assuming the government provides a uniform public good G(t) and finances this expenditure via lumpsum taxes. (b) Analyse the effects on the steady-state and the transition path of a permanent increase government spending; (c) Analyse the effects on the steady-state and the transition path of a temporary increase government spending; (d) Assume now that the government decides to finance public expenditure by taxing investment income at rate τ k .
Problem 1. Ramsey
(a) Rewrite and explain the main equilibrium equations of the Ramsey model assuming the government provides a uniform public good G(t) and finances this expenditure via lumpsum taxes.
(b) Analyse the effects on the steady-state and the transition path of a permanent increase government spending;
(c) Analyse the effects on the steady-state and the transition path of a temporary increase government spending;
(d) Assume now that the government decides to finance public expenditure by taxing investment income at rate τ k . Thus the real interest rate that the households face is now given by r(t) = 1 − τ k f 0 (k (t)) and the government budget constraint is τ kf 0 (k (t)) k = G(t). Repeat the analysis in points [(a)], [(b)] and [(c)].
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