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1. State the Lifetime Government Budget Constraint

2. Write the Consumers Lifetime BC in real terms with a lump sum tax “t”

3. Combine BC’s from 1.) and 2.) to form the economy wide BC using the common taxes.

4. Suppose Government holds spending fixed but decides to decrease t1. a. Explain what happens to t2 b. Show what happens to the overall changes in taxes by expressing the change in t2 as a function of the change in t2 c. Consumer has full knowledge of the economy. What does the consumer do with the period 1 tax break? Explain why? d. What is the overall effect on national savings and why?

5. Write the Consumer’s LBC with a consumption tax “tau” in each period. 6. Solve to express the LBC with c2 as a function of c1 in order to graph it. 7. Suppose first period taxes decrease a. What happens to the slope of the BC? b. What occurs with optimal c1 and c2 and why? c. What occurs with national savings? i. Is there a shift and if so, which direction? ii. Graphically show the change in the funds market iii. What happens to the optimal investment choice of firm and why

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Chika Ilonah
Chika IlonahLv10
28 Sep 2019

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Related questions

Suppose the government is considering a tax policy that will reduce taxes by $100. In the economy, households consume 80% of each additional dollar earned. Assume that the tax cut doesn't affect GDP (Y). 

a) How will this tax affect consumption?

b) Calculate the change in private savings.

c) Calculate the change in government savings and national savings.

d) What will happen to the current account as a result of this policy?

e) How would your previous answers change if we assume Ricardian equivalence?

Suppose the government is considering a tax policy that will reduce taxes by $100. In the economy, household consume 80% of each additional dollar earned. Assume that the tax cut has no effect on GDP (Y)

(a) How will this tax affect consumption?
(b) Calculate the change in private savings.
(c) Calculate the change in government savings and national savings
(d) What will happen to the current account as a result of this policy?
(e) How would your previous answers change if we assume Ricardian equivalence?

Automatic stabilizers lead to changes in taxation and government spending as economic output varies. How do automatic stabilizers impact tax revenue and government spending during a recession?

Tax revenue will:

a. increase

b. not change

c. decrease

and government spending will:

a. increase

b. not change

c. decrease

Suppose that the government is required to balance the budget. Which of the following is an appropriate discretionary approach during a recession and what effect would it have to the economy?

a. Invest in public infrastructure that promotes employment and stimulates the economy.

b. Cut government spending to equal tax revenue possibly magnifying the effects of a recession.

c. Increase government spending to stimulate the economy causing an increase in overall aggregate demand.

d. Cut taxes to encourage consumer spending which would minimize the effects of the recession.

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