Rearrange this equation b t g 1 r substitute this

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Unformatted text preview: ich to repay. Rearrange this equation B= T -G 1+ r Substitute this equation into the current period constraint and rearrange. G+G = T+T 1+r 1+r Notice that the future variables, G and T are discounted down to the present value so we can everything into one equation. This is done by dividing by 1/(1+r). The left hand side of the equation demotes the present values of government purchases and the right hand side is the present value of taxes. COMPETIVE EQUILIBRIUM Now that the government is in the model the equilibrium will entail: 1) Consumer choices c, c and s 2) The government choice of G ,G . T and T . Notice that we have the first period bond market open. This market is where some of the expenditure of second period is financed. Consumers “spend” their saving in the second period. This bond market is open to individuals and governments alike. Both groups compete for saving in the first period. Therefore: private saving = total supply of bonds (1) S=B Now recall that saving is what is left over after consumption and taxes are deduct...
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This note was uploaded on 02/23/2014 for the course ECONOMICS 2152A taught by Professor Grekou during the Fall '10 term at UWO.

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