My classmates and I are busy crunching the numbers attempting to solve this prob

Question

My classmates and I are busy crunching the numbers attempting to solve this problem and we haven't come up with the solutions. Help would be greatly appreciated!!



Description of the economy

Government. The economy lives for two periods: t = 1 and t = 2 (we can

interpret t = 1 as being today and t = 2 as being some fairly distant future). In

each period, the government must make purchases: G1 = 10 and G2 = 10. At t = 1

the government is able to collect taxes T1 = 5 and can sell bonds (i.e. issue debt)

B1 to cover the remaining part of the expenditure. That debt will have to repaid

in period t = 2 with interest r. There is a large number of risk-neutral investors

that buy the government debt. These investors have access to some risk-free bond

(e.g. a German T-bill) that yields a net return r.

Exercises

Explanation / Answer

My classmates and I are busy crunching the numbers attempting to solve this prob

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