Problem 5 - Ricardian Equivalence There is a consumer who lives for two periods. His income is given by Y1 and Y2. He has access to the credit market with the interest rate r. The government collects lump-sum taxes T1 >0 and T2 >0. The government can run a surplus or a deficit, but must borrow (or save) in the credit market at the interest rate r. 1. Write down the government intertemporal budget constraint. Note that the government also has the access to the credit market. Write down the consumer's budget constraint. Show the consumption choice graphically. 2. Imagine that the government decreases the taxes in period 1 and raises tax in period 2 to pay back any debt and interest from the previous period. This is anticipated by consumers. Show the new consumption choice. How does that compare to the result from the previous section. 3. Assume that the government is not constraint by the balanced budget and can have deficit in both periods. Now the government is being generous and pays transfers Ti <0 and T2 <0. Show the new consumption choice.

Problem 5 - Ricardian Equivalence There is a consumer who lives for two periods. His income is given by Y1 and Y2. He has access to the credit market with the interest rate r. The government collects lump-sum taxes T1 >0 and T2 >0. The government can run a surplus or a deficit, but must borrow (or save) in the credit market at the interest rate r. 1. Write down the government intertemporal budget constraint. Note that the government also has the access to the credit market. Write down the consumer's budget constraint. Show the consumption choice graphically. 2. Imagine that the government decreases the taxes in period 1 and raises tax in period 2 to pay back any debt and interest from the previous period. This is anticipated by consumers. Show the new consumption choice. How does that compare to the result from the previous section. 3. Assume that the government is not constraint by the balanced budget and can have deficit in both periods. Now the government is being generous and pays transfers Ti <0 and T2 <0. Show the new consumption choice.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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