Assume that the individual's utility function is given as: U(C,C,) = 2C³C,³ The interest rate is 10% and X= X₁ =1000. Government decreases the current taxes by 100, all else remains same, numerically show that the Ricardian Equivalence holds true.
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- Problem 2. Consider our two-period model. Instead of having lump-sum taxes t, t', what if we have instead proportional taxes T, T' corresponding to current and future proportional taxes, respectively. A. B. C. Derive mathematically the lifetime budget constraint in this case. (Hint: From micro, what is a proportional tax?) What is the slope of the lifetime budget constraint? Explain briefly why the Ricardian equivalence theorem doesn't really apply in this case.If Ricardian equivalence is true, and the government raises taxes(holding spending constant), how does the average person’s behaviorchange? In other words, how does he or she react to a tax increase?Is is possible for federal investment to have a negative rate of return? Yes, if the spending results in a strong crowding-out effect or if state and local governments substitute towards federal investment by reducing stateand local investment. Either would potentially reduce future productivity and output (GDP), resulting in a negative return. Yes, if the spending results in a weak crowding-out effect or if state and local investments complement the increase in federal investment by. Either would potentially reduce future productivity and output (GDP) and hence result in a negative return. No. At worst, federal investment can have no future return as the expenditure offered some form of service (ex. jobs training) or useful infrastructure (ex. highways). No. If in the future there were a negative return, the federal government would increase expenditures again to offset it.
- i) C = 1500 + mpc (Y – tY)ii) I = 800iii) G = 500iv) X – M = 500 – mpi (Y)where:t = the (flat) tax ratempc = the marginal propensity toconsumempi = the marginal propensity toimportsuppose mpc = .80, t = .25, mpi =.2a. solve for the equilibrium outputb. Solve for the (government)spending multiplier.c. When we discussed the multiplier we discussed the impact effect. For example, suppose that G increases by 100to 600 and we assume, as we often do, that firms match the increase in demandby increasing Y by 100. In round two,this is an increase in income of 100 to consumers. Trace out exactly where this100 increase in income goes in the second round and compare to our simpler treatmentwith a closed economy and lump sum taxes. Hint, there are three leakages toaddress(again, please be very specific as to where the 100 increase income‘goes’ in this second round).d. What would happen to the multiplier if the mpi rises to .25. Please explain the intuition.TRUE/FALSE Accordingto Ricardian Equivalence in a strict sense, the tax multiplier is zero.1. Consider a two-period economy with lump-sum taxes. Suppose ment announces a tax cut of 10 in period 1 holding government spending constant in periods 1 and 2. (i.e., ATi assuming no debt inherited from period 0, i.e., Bo 10 percent. the govern -10, AG AG2 0.) We are 0. Suppose the interest rate is (a) Calculate the change in taxes in period 2, AT2. (b) Calculate the change in the primary and secondary fiscal deficits in pe- riod 1 (c) Calculate the change in the primary and secondary fiscal deficits in pe- riod 2
- The government budget constant for an economy is given below: G + TRị + rDt-1-7; = D¿ – Di-1 where G = government spending, TR is transfer payments, rD;-1 is interest payments on public debt, T is tax revenue and D is the stock of public debt. According to the government budget constraint in what way (or ways) can government expenditures be funded? O a. by a combination of tax revenue and borrowing from the public O b. by printing money O c. by tax revenue O d. by borrowing from the public O e. by borrowing from the central bankConsider an economy in which individuals choose between work time and leisure time. They spend all of their wages from work hours on consumption goods. Suppose that the government introduces an ad valorem tax of 45 percent imposed on all consumption goods and on leisure time. In the case of consumption, the tax applies to the expenditure amount. In the case of leisure time, the tax applies to the value of leisure time assessed at the individual's hourly wage from labour. What income tax rate is equivalent to this tax on consumption and leisure? [NOTE: If necessary, please round your answer to the nearest percent. Enter the whole number corresponding to the percentage rate. Do not enter the percent sign. For example, if your answer is 12 percent, you should enter 12 in the answer space, not 0.12.]Given: C = 250 + 0.8 Y I = 150 G = 300 TR = 100 NX = 100 t =0.25 i) Find the equilibrium level of income. ii) Suppose, because of current COVID-19 situation C falls to 50, MPS falls to .05, I falls to 10, G falls to 100 and NX falls to 10. How much TR should the government increase to have the same level of equilibrium income as in part i)? iii) In determining the required change in TR in part ii), which multiplier did you use and why? (Hint: keep in mind the consumption tendency households may have under the COVID 19 situation in selecting the multiplier). iv) Draw a graph to show the appropriate changes between part i) and part ii). v) Give an example related to current Bangladeshi situation where the government may follow a 'Transfer Promoting Policy' instead of a 'Growth Promoting Policy' in determining who gets the transfer payment. vi) Instead of paying transfer (TR) if the government were to increase government spending (G), what type of crowding out would you expect? Briefly…
- Given: C = 250 + 0.8 Y I = 150 G = 300 TR = 100 NX = 100 t =0.25 i) Find the equilibrium level of income. ii) Suppose, because of current COVID-19 situation C falls to 50, MPS falls to .05, I falls to 10, G falls to 100 and NX falls to 10. How much TR should the government increase to have the same level of equilibrium income as in part i)? iv) Draw a graph to show the appropriate changes between part i) and part ii).The country of Aquilonia has a tax system identical to that of Canada. Suppose an Aquilonian bought a parcel of land for $10,000 in 1960 when the price index equalled 100. In 2019, the person sold the land for $100,000, and the price index equalled 500. If the person must pay 20 percent of any capital gain in taxes, what is the after-tax real capital gain (in 2019 dollars) on the land? a. $72,000 b. $32,000 c. $6400 d. $62,000For an economy, the following information is given to you. C= 0.7(1 -t)Y I 300-0.02r M"/P= 2+0.2Y – 0,3r where C is consumption t is proportion income tax rate, I is investment, M" is money demand, P is price, Y is income (output) and r is real interest rate. If Government expenditure (G) is 479 , tax rate (t) is 14%, price level ( P) is 17, and nominal money supply is 980, the IS-LM equilibrium output is (two decimal points).