The Solow model with consumption taxes. Consider an economy with a government that collects taxes on...

 

Transcribed Image Text:

The Solow model with consumption taxes. Consider an economy with a government that collects taxes on consumption (e.g., VAT) such that Tt = TcCt and spends those revenues on the purchase of the consumption good, Gt. The exogenous parameter 0 < Tc < 1 is the consumption tax rate. This government balances its budget every period t: Gt = Tt. In this case, consumption is proportional to disposable income: Ct = (1 - s) (Yt - Tt). 1. Derive all the equations of this version of the model for (St/Nt), (It/Nt), (Yt/Nt), for every period t. 2. Derive all the equations of this version of the model for (S/N)*, (I/N)*, y* in the steady state equilibrium. Plot them on the plane for k* on the horizontal axis and (S/N)*, (I/N)*, y* on the vertical axis. 3. Derive the Fundamental Solow Equation of Motion and the corresponding graph. 4. Analyze graphically and intuitively the effects of a reduction in the consumption tax rate on k*, y*, c*, i*, and g*, where g* = (G/N)*. Use both graphs. Find expressions for the steady-sta equilibrium levels of k*, y*, 5. Assume that f(k)= ka. c*, i*, and g*. The Solow model with consumption taxes. Consider an economy with a government that collects taxes on consumption (e.g., VAT) such that Tt = TcCt and spends those revenues on the purchase of the consumption good, Gt. The exogenous parameter 0 < Tc < 1 is the consumption tax rate. This government balances its budget every period t: Gt = Tt. In this case, consumption is proportional to disposable income: Ct = (1 - s) (Yt - Tt). 1. Derive all the equations of this version of the model for (St/Nt), (It/Nt), (Yt/Nt), for every period t. 2. Derive all the equations of this version of the model for (S/N)*, (I/N)*, y* in the steady state equilibrium. Plot them on the plane for k* on the horizontal axis and (S/N)*, (I/N)*, y* on the vertical axis. 3. Derive the Fundamental Solow Equation of Motion and the corresponding graph. 4. Analyze graphically and intuitively the effects of a reduction in the consumption tax rate on k*, y*, c*, i*, and g*, where g* = (G/N)*. Use both graphs. Find expressions for the steady-sta equilibrium levels of k*, y*, 5. Assume that f(k)= ka. c*, i*, and g*.

Answer rating: 100% (QA)

1 Derive all the equations of this version of the model for StNt ItNt YtNt for every period t The equations of the Solow Model with consumption taxes can be derived from the following equations Invest... View the full answer