208-2011-PS3

208-2011-PS3 - Economics 208 Macroeconomics Marek Kapika c...

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Economics 208 Marek Kapiˇ cka Macroeconomics Spring 2011 Problem Set 3 1 Ricardian Equivalence Assume that agents have preferences over consumption in period 1 and 2 given by U ( c 1 ,c 2 ) = ln c 1 + ln c 2 . The agents are endowed with y 1 units of consumption good in period 1 and with y 2 units of consumption good in period 2. They pay lump-sum taxes T 1 and T 2 in periods 1 and 2. The agents can freely borrow and save at an interest rate r . 1. Write down the present value budget constraint for the consumers 2. Solve for c 1 and c 2 as a function of y 1 , y 2 , T 1 , T 2 , and r . 3. Suppose that the government has expenditures G 1 < y 1 and G 2 < y 2 , exoge- nously given. Write down the present value budget constraint of the govern- ment. 4. Write down the market clearing condition and solve for the equilibrium interest rate r . 5. Does the Ricardian Equivalence hold? Explain. Now assume that there are two classes of agents. Poor agents receive income y L in both period 1 and 2, while rich agents receive income
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This note was uploaded on 12/26/2011 for the course ECON 208 taught by Professor Staff during the Fall '08 term at UCSB.

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208-2011-PS3 - Economics 208 Macroeconomics Marek Kapika c...

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