Two period model
It consists of
The government's Problem: (two period)
Period 1: G - government expenditure
G = T + B
Period 2: G' + B(1+r) = T'
Lifetime: budget condition:
Combine the two equation and solve.
1 + 𝑟 = 𝑇 +
1 + 𝑟
Competitive equilibrium in two period model:
Such that the following conditions:
Consumer solves her utility-maximizing problem.
Government's lifetime budget constrain holds.
(most important one) market-cleaning condition
[Consumers' Savings S = B Demand of Bond]
Interest rate will change due to Law of Supply and Demand.
Tuesday, October 16, 2018