1. Consider a two-period economy with lump-sum taxes. Suppose thement announces a tax cut of 10 in period 1 holding government spendingconstant in periods 1 and 2. (i.e., ATassuming no debt inherited from period 0, i.e., Bo10 percentgovernΔG,0.) We are-10, AG10. 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 inре-riod 1(c) Calculate the change in the primary and secondary fiscal deficits in pe-riod 2

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Asked Nov 19, 2019
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I need help with parts a, b and c

1. Consider a two-period economy with lump-sum taxes. Suppose the
ment announces a tax cut of 10 in period 1 holding government spending
constant in periods 1 and 2. (i.e., AT
assuming no debt inherited from period 0, i.e., Bo
10 percent
govern
ΔG,
0.) We are
-10, AG1
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
ре-
riod 1
(c) Calculate the change in the primary and secondary fiscal deficits in pe-
riod 2
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1. Consider a two-period economy with lump-sum taxes. Suppose the ment announces a tax cut of 10 in period 1 holding government spending constant in periods 1 and 2. (i.e., AT assuming no debt inherited from period 0, i.e., Bo 10 percent govern ΔG, 0.) We are -10, AG1 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 ре- riod 1 (c) Calculate the change in the primary and secondary fiscal deficits in pe- riod 2

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Expert Answer

Step 1

In the two period economy with government and lump sum tax, we have the following budget constraints of the government

8+(1+r)b, 4...
82+b (1r)+t. 2)
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8+(1+r)b, 4... 82+b (1r)+t. 2)

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Step 2

To get the lifetime budget constraint of the government combine the two equations: ie solving equation gives us:

t2
1+ 1+r
g1
...3)
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t2 1+ 1+r g1 ...3)

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Step 3
  1. A) The government has to satisfy it’s lifetime budget constraint and that means that the amount of tax in period 2 changes by the following

              &n...

Af21+)A
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Af21+)A

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