PS02-S11

# PS02-S11 - University of Minnesota Macroeconomic Policy...

This preview shows pages 1–3. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: University of Minnesota Macroeconomic Policy 4731H, Spring 2011 Problem Set # 2 Instructor: Justin Barnette Due date: 03 / 8 / 2011 Question 1 (40 points) This question is about the Ramsey problem in the Neoclassical Growth Model. Suppose the government imposes taxes on consumption, labor and capital income { τ c t ,τ l t ,τ k t } ∞ t =0 . 1 Given taxes, prices and k , the representative household solves max { c t ,l t ,k t +1 ,x t } ∞ X t =0 β t u ( c t ,l t ) s.t. ∞ X t =0 p t [(1 + τ c t ) c t + x t ] = ∞ X t =0 p t [(1- τ l t ) w t l t + (1- τ k t ) r t k t ] and k t +1 = (1- δ ) k t + x t where c t is time t consumption, l t is time t labor, x t is time t investment and k t is time t capital, p t is time t price of consumption, w t is time t wage and r t is time t rental rate of capital. On the other hand, given prices, the representative firm solves at any t max ( y t ,l t ,k t ) y t- w t l t- r t k t 1 Again, the government does not have access to taxes on investment, just to make it simpler. 1 University of Minnesota Macroeconomic Policy 4731H, Spring 2011 s.t. y t = F ( k t ,l t ) In addition, government balances its lifetime budget constraint ∞ X t =0 p t g t = ∞ X t =0 p t [ τ c t c t + τ l t w t l t + τ k t r t k t ] As derived in class, the Implementability Constraint in the Neoclassical Growth Model is ∞ X t =0 β t [ u c ( t ) c t + u l ( t ) l t ] = A (1) where A ≡ u c (0) (1- τ k ) (1+ τ c ) k ( r + 1- δ ) , u c ( t ) ≡ ∂u ( c t ,l t ) ∂c t and u l ( t ) ≡...
View Full Document

## This note was uploaded on 03/26/2011 for the course ECON 4731H taught by Professor Justinbarnette during the Spring '11 term at Minnesota.

### Page1 / 5

PS02-S11 - University of Minnesota Macroeconomic Policy...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online