homework4 2010 - ECN/APEC 7240 Spring 2010 Homework 4 Due...

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ECN/APEC 7240 Spring 2010 Homework 4 Due 2/24/10 1) We augment the Consumption RBC Model with Cobb-Douglas production and CRRA utility by including government spending financed by lump-sum taxes. Let T t be the tax at t with τ t = ln T t = t 0 + t 1 . We assume that t 0 = 0 + gt and t 1 is an AR(1) process such that , 1 1 1 1 ε φτ + + + = t t t where φ ( - 1,1) and t is i.i.d and uncorrelated with t a . ζ = T 0 / Y 0 is exogenous. a) What are the Euler equation and budget constraint for this model? b) How do C 0 / Y 0 , K 0 / Y 0 , and r 0 depend on the exogenous parameters of the model? c) Derive the log-linearized Euler equation and budget constraint assuming now that c t 1 = η ck k t 1 + ca a t 1 + c t 1 and similarly for k t +1 1 and y t 1 . d) Does the introduction of the lump-sum tax change the equation that determines ck ? What about the equations that determine ca , kk , ka , yk , or ya ? 2)
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This note was uploaded on 01/09/2011 for the course ECON 7140 taught by Professor Kutler during the Spring '10 term at Utah Valley University.

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homework4 2010 - ECN/APEC 7240 Spring 2010 Homework 4 Due...

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