101-2010-L15

101-2010-L15 - Econ101 RicardianEquivalence GovernmentDebt n

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Econ 101 Ricardian Equivalence
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Government Debt n How should the government choose the  level of government debt?
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US Government Debt  
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Government n Government expenditures:  G G n Tax collected:  t t n Lump sum taxes n Bonds issued (bought):  B n B> 0 : borrower from the private sector n B <0 : lender to the private sector 
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Government n Current period budget constraint n Future period budget constraint n Present value budget constraint B t G + = ' ) 1 ( ' t B r G = + + r t t r G G + + = + + 1 ' 1 '
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Competitive Equilibrium n Consumers choose  c , c ’, s   optimally, given  r n Government PVBC holds n Interest rate such that the credit market  clears: B s =
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Ricardian Equivalence (under certain conditions!) § Theorem : In a CE, a change in the timing of taxes has no  effect on consumers’ welfare and consumption § Corollary : A tax-cut is not a free lunch David Ricardo (1722-1823) Named after:
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When you receive a letter like this one…
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You should also receive another one… Dear Taxpayer: We regret to inform you that the present value of your future tax liabilities has increased by the amount of: Increase future
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Ricardian Equivalence (under certain conditions!) § Theorem : In a Competitive Equilibrium, a change in
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101-2010-L15 - Econ101 RicardianEquivalence GovernmentDebt n

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