Assume an economy with 1,000 consumers. Each consumer has income in the current period of 50 units and future income of 60 units and pays a lump-sum tax of 10 units in the current period and 20 units in the future period. The market real interest rate is 8%. Of the 1,000 consumers, 500 consume 60 units in the future, while 500 consume 20 units in the future.
(a) Determine each consumer's current consumption and current saving.
(b) Determine aggregate private saving, aggregate consumption in each period, government spending in the current and future periods, the current-period government deficit, and the quantity of debt issued by the government in the current period.
(c) Suppose that current taxes increase to 15 units for each consumer. Repeat parts (a) and (b) and explain your results.

  • CreatedDecember 05, 2014
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