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tutorial5questions - Figure 1 Consider two scenarios listed...

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EC2102 Macroeconomic Analysis I Tutorial 5, Week 9, March 14-18, 2011 Time goes on forever. An economy consists of an in&nitely-lived individual who values consump- tion and leisure, and has h is owned by the consumer; and a government. Let us assume that the government plans to spend G t at time period t where G t & 0 for all t , and its tax revenues of T t levied on the representative Y t = z t F ( K t ;N t ) : Suppose also that the economy is initially in an equilibrium. The labour and goods market
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Unformatted text preview: Figure 1 Consider two scenarios listed below, and explain clearly how each a/ects equilibria in the labour and goods market in time period 1 as illustrated in &gure 1, taking care to explain clearly the impact on the decisions made in time period 1 by the representative consumer and the representative &rm. Scenario 1 At the beginning of time period 1, the government announces that it will cut the amount of government expenditures at time period 1, and only time period 1, by exactly & , where & < G 1 : Scenario 2 At the beginning of time period 1 there is a decrease in z 1 from z 1 to b z 1 . 1...
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