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Economics 2152A/B
Jennifer Mori

Government in the Two Period Model chapter 9 part 2 We will now place a government in our model There are a few preliminary points that we need to make1All government decisions to use some of the production of our real economy Y can be thought of as government expenditure G 2 This decision is made exogenously therefore G is an exogenous variable3 The spending decision can be financed bya lumpsum taxes T or b Using the credit marketand selling bondsThe interest rate that the government pays is the real interest rate r Given these three conditions we can proceed The governments CURRENT period budget constraint is GTBthis is just a restatement of condition 3 The governments FUTURE period budget constraint will include future spending future taxes and repayment with interest of the output in the form of consumption goods that was borrowed in the previous period G1 rBT Aside this is still a TWO period economy so anything borrowed in the first period must be paid back with interest in the second period there can not be any second period borrowing since there is no third period in which to repayRearrange this equation B TG 1 rSubstitute this equation into the current period constraint and rearrangeTT GG1r 1r
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