Question: Problem 2 Consider again the basic RBC model, but now allow for government spending shocks as a source of fluctuations. The representative household maximizes: s=1

 Problem 2 Consider again the basic RBC model, but now allowfor government spending shocks as a source of fluctuations. The representative householdmaximizes: s=1 1-1 where 0 0, subject to the constraint: C, +1,+X=FK,+ W.in each period. In this constraint. X is exogenous lump-sum taxation.

which we assume is equal to government spending. The rest of thenotation is as in the slides. The law of motion for capitalis: K1+1 ={l )KI +1} in each period. The production function is:r AfKQ'\". 0

Problem 2 Consider again the basic RBC model, but now allow for government spending shocks as a source of fluctuations. The representative household maximizes: s=1 1-1 where 0 0, subject to the constraint: C, +1, +X=FK,+ W.in each period. In this constraint. X is exogenous lump-sum taxation. which we assume is equal to government spending. The rest of the notation is as in the slides. The law of motion for capital is: K1+1 ={l )KI +1} in each period. The production function is: r AfKQ'\". 0

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