Question I (35 points) Ricardian equivalence Assume an economy with 1,000 consum
ID: 1109891 • Letter: Q
Question
Question I (35 points) Ricardian equivalence 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 in the current period and 20 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. 1) (5 points) Determine each consumer's current consumption and current saving. 2) (5 points) Determine aggregate private saving and aggregate consumption in cach period. 3) (10 points) Find 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. 4) (5 points) Is the credit market in equilibrium? Explain. 5) (10 points) Suppose the current taxes increase to 15 for each consumer. RepeatExplanation / Answer
Answer:
a) Determine each consumer’s current consumption and current savings.
Income is 50 units now, 60 units later.
Taxes are 15 units now, 20 units later.
Income - Taxes = Disposable Income.
Disposable income is 35 units now, 40 units later.
Type 1.
Future consumption: 60 units.
Total consumption = current consumption + future consumption
(50-15) + (60-20) = current consumption + 60
75 = current consumption + 60
Current consumption = 15
Current savings = (50-15) - 15 = 20
Type 2.
Future consumption: 20 units.
Total consumption = current consumption + future consumption
(50-15) + (60-20) = current consumption + 20
75 = current consumption + 20
Current consumption = 55
Current savings = (50-15) - 55 = -20
B)
Aggregate private savings:
APS = 20*500 - 20*500 = 0
Aggregate consumption
Period 1: 500*15 + 500*55 = 35,000
Period 2: 500*60 + 500*20 = 40,000
Aggregate income:
Period 1: 35*500 + 40*500 = 37,500
Period 2: 40*500 + 40*500 = 40,000
Government spending:
Period 1: 37,500 - 35,000 = 2,000
Period 2: 40,000 - 40,000 = 0
Taxation:
Period 1: 1000*10 = 10,000
Period 2: 1000*20 = 20,000
Deficit:
Period 1: 10,000 - 2,000 = 8,000
Period 2: 20,000 - 0 = 20,000
In period 1, the government runs a surplus of 8,000. In period 2, the government runs a surplus if 20,000.
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