Suppose that y =100 (income today) y' = 150 (income tomorrow) • r = 10% (interest rate on bonds) • t = 10 (taxes today) • t = 10 (taxes tomorrow) Suppose that c = 100. Is the consumer borrowing or saving, today? And what will her budget constraint look tomorrow? The consumer is borrowing. Her budget constraint tomorrow will be c' = 150 -10 - 10*(1.1) = 129 The consumer is saving. Her budget constraint tomorrow will be c' = 150 -10 + 10*(1.1) = 151 The consumer is neither borrowing nor saving - she is breaking even. Her budget constraint tomorrow will be c' = 150 -10 = 140 The consumer is saving. Her budget constraint tomorrow will be c' = 150 + 10*(1.1) = 161

Suppose that y =100 (income today) y' = 150 (income tomorrow) • r = 10% (interest rate on bonds) • t = 10 (taxes today) • t = 10 (taxes tomorrow) Suppose that c = 100. Is the consumer borrowing or saving, today? And what will her budget constraint look tomorrow? The consumer is borrowing. Her budget constraint tomorrow will be c' = 150 -10 - 10(1.1) = 129 The consumer is saving. Her budget constraint tomorrow will be c' = 150 -10 + 10(1.1) = 151 The consumer is neither borrowing nor saving - she is breaking even. Her budget constraint tomorrow will be c' = 150 -10 = 140 The consumer is saving. Her budget constraint tomorrow will be c' = 150 + 10*(1.1) = 161

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter17: Federal Deficits, Surpluses, And The National Debt

Section17.3: Why Worry Over The National Debt?

Problem 1YTE

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