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Ricardian equivalence In the following questions, make the following assumptions u(c) = log(c), R = 0, y₁ = 100, y2 = 200, f₁ = 50. (a) Suppose government spending in periods 1 and 2 are given by g₁ and 92. Write the government's intertemporal budget constraint. (b) State the Ricardian equivalence hypothesis. (c) Suppose g₁ = 10,92 = 10, and to finance these spending, the government imposes taxes t₁ = 10, t₂ = 10. Find the values of C1, C2 and f₂. (d) In an effort to increase today's consumption, suppose the government lowers t₁to 0. Will this change the values of c₁ and c₂? How about f₂? If any of these changes, compute their values. (e) In words, explain the behavior of the consumers in (c) and (d).

Ricardian equivalence In the following questions, make the following assumptions u(c) = log(c), R = 0, y₁ = 100, y2 = 200, f₁ = 50. (a) Suppose government spending in periods 1 and 2 are given by g₁ and 92. Write the government's intertemporal budget constraint. (b) State the Ricardian equivalence hypothesis. (c) Suppose g₁ = 10,92 = 10, and to finance these spending, the government imposes taxes t₁ = 10, t₂ = 10. Find the values of C1, C2 and f₂. (d) In an effort to increase today's consumption, suppose the government lowers t₁to 0. Will this change the values of c₁ and c₂? How about f₂? If any of these changes, compute their values. (e) In words, explain the behavior of the consumers in (c) and (d).

MACROECONOMICS
MACROECONOMICS
14th Edition
ISBN:9781337794985
Author:Baumol
Publisher:Baumol
Chapter11: Managing Aggregate Demand: Fiscal Policy
Section11.B: Algebraic Treatment Of Taxes And Fiscal Policy
Problem 2TY
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Ricardian equivalence In the following questions, make the following assumptions u(c) = log(c), R = 0, y₁ = 100, y2 = 200, f₁ = 50. (a) Suppose government spending in periods 1 and 2 are given by g₁ and 92. Write the government's intertemporal budget constraint. (b) State the Ricardian equivalence hypothesis. (c) Suppose g₁ = 10,92 = 10, and to finance these spending, the government imposes taxes t₁ = 10, t₂ = 10. Find the values of C1, C2 and f₂. (d) In an effort to increase today's consumption, suppose the government lowers t₁to 0. Will this change the values of c₁ and c₂? How about f₂? If any of these changes, compute their values. (e) In words, explain the behavior of the consumers in (c) and (d).
Transcribed Image Text:Ricardian equivalence In the following questions, make the following assumptions u(c) = log(c), R = 0, y₁ = 100, y2 = 200, f₁ = 50. (a) Suppose government spending in periods 1 and 2 are given by g₁ and 92. Write the government's intertemporal budget constraint. (b) State the Ricardian equivalence hypothesis. (c) Suppose g₁ = 10,92 = 10, and to finance these spending, the government imposes taxes t₁ = 10, t₂ = 10. Find the values of C1, C2 and f₂. (d) In an effort to increase today's consumption, suppose the government lowers t₁to 0. Will this change the values of c₁ and c₂? How about f₂? If any of these changes, compute their values. (e) In words, explain the behavior of the consumers in (c) and (d).
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