This essay focuses on consumption in the current and future
period. The utility is well behaved. consumption Suppose that the government,
instead of borrowing
The agents derive utility from consumption in the current and future
period. The utility is well behaved. Suppose that the government,
instead of borrowing in the current period, runs a government loan
program. That is, loans are made to consumers at the market real
interest rate r, with the aggregate quantity of loans made in the
current period denoted by L.Macroeconomists use this economic measure for two reasons. The first is to assess aggregate savings in each household; savings refer to the portion of income that is not use for consuming goods and services. Aggregate savings in the economy feeds into the national supply of capital. Therefore, it can be use to assess the long-term productive capacity of an economy.
Macroeconomists typically use consumption as a proxy of the overall economy.
When valuing a business, a financial analyst would look at the consumption trends in the business’ industry. It is an important step, as it helps the analyst with the assumption section
lump-sum taxes on consumers in the current period (denoted by
T), while government spending is zero in both periods (i.e., G =
G0 = 0). In the future period, when the government loans are
repaid by consumers, the government rebates this amount as lumpsum transfers (negative lump-sum taxes) to consumers. Finally, each
consumer shares an equal amount of the total tax burden (or of the
total transfer benefit)
(a) Write down the government’s current period budget constraint
and its future period budget constraint. [10]
(b) Determine the present value budget constraint of the government. [7]
(c) Write down the lifetime budget constraint consumption of a consumer. [7]
(d) Define the competitive equilibrium. [7]
(e) List the full set of conditions characterising the competitive consumption equilibrium given the exogenous variables. [7]
(f) Suppose there is a change in the loan program ∆L. Argue why
or why not Ricardian equivalence holds in this setup. Provide
an intuition for your answer. [12].