Tut2(Jan22) - consumer has no assets The interest rate is zero The consumer desires perfectly smooth consumption over his lifetime(a What are the

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Economics 291: Canadian Macroeconomic Policy Tutorial #2 (week of Jan 22) 1. Using the concepts of substitution and income effects to show the effect of a decrease in interest rate on the desired savings of a borrower. 2. Ricardian equivalence implies that permanent increase in government spending has no effect on desired consumption and desired national savings. True/False. Explain. 3. What effect does a temporary increase in government spending – for example, to fight a war – have on the desired consumption and desired national savings? Does it matter whether the temporary increase in government spending is financed by current tax or by future tax? 4. A consumer lives two periods, called current period and future period. His disposable income is $600 during the current period, $200 during the future period. The
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Unformatted text preview: consumer has no assets. The interest rate is zero. The consumer desires perfectly smooth consumption over his lifetime. (a) What are the consumptions in each period? What is the desired saving? (b) Now suppose there is a temporary increase in government spending by $100, and all the current and future tax will be imposed on this consumer. If the tax is to be financed by current tax, what will happen to his current and future consumption, as well as the desired national savings? (c) Continue from part (b). Now suppose the increase in government spending is going to be financed by future tax, what will happen to his current and future consumption, as well as the desired national savings?...
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This note was uploaded on 10/12/2009 for the course ECON 291 taught by Professor J liu during the Spring '07 term at Simon Fraser.

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