ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Suppose that we have an economy with many
identical households. There is a government
that exogenously consumes some output and
pays for it with lump sum taxes. Lifetime utility
for a household is: U =InCt +ßlnCt+1 The
household faces two within period budget
constraints given by: Ct + St = Yt – Tt Ct+1
=Yt+1 -Tt+1 +(1+rt)St
Use the Euler equation and intertemporal
budget constraint to derive an expression for
the consumption function.
The government faces two within period
budget constraints:
(1) G_t + SG_t = T_t
(2) G_(t+1) = T_(t+1) + (1 + r_t)SG_t
In equilibrium, what must be true about S_t
and SG_t?
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Transcribed Image Text:Suppose that we have an economy with many identical households. There is a government that exogenously consumes some output and pays for it with lump sum taxes. Lifetime utility for a household is: U =InCt +ßlnCt+1 The household faces two within period budget constraints given by: Ct + St = Yt – Tt Ct+1 =Yt+1 -Tt+1 +(1+rt)St Use the Euler equation and intertemporal budget constraint to derive an expression for the consumption function. The government faces two within period budget constraints: (1) G_t + SG_t = T_t (2) G_(t+1) = T_(t+1) + (1 + r_t)SG_t In equilibrium, what must be true about S_t and SG_t?
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