1. The global pandemic has caused private household consumption to fall. Use a two-period model of consumption with consumption taxes to argue that both fiscal policy (a policy controlling the timing of taxes, keeping government spending constant) and monetary policy (a policy controlling the real interest rate) can be used to increase current consumption. For reference, the consumer’s intertemporal budget constraint should be written as:

   (1+t′)c′ y′ (1+t)c+ 1+r =y+1+r

   Explain why in this version of the model the timing of tax matters.

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When considering a twoperiod model of consumption with consumption taxes it is important to consider ... View the full answer