Question

Hello can someone help me answer this question please

Dr. Maria Candido Version A 3. (9 points) Consider an economy that exist for three periods. The intertemporal budget constraint for the three-period economy is given by: T2-G T-G T,-G1+ (1+i)B (1+i) (1+ where T is defined as net taxes, the difference between taxes and transfers, G are government purchases of goods and services, i is the interest rate, and B, is the stock of debt at the beginning of period 1. Suppose that the government cuts taxes today (period 1) by $800b and that the interest rate is constant at 4%. (3 pts) What could the government do in period 1 to satisfy its intertemporal budget constraint? Be specific. a. (3 pts) Suppose that the government does nothing in period 1 to offset the government do in period 2 to satisfy its intertemporal budget constraint? Be specific. tax cut in period 1. What could the b. (3 pts) Suppose that the government does nothing in periods 1 and 2 to offset the tax cut in period 1. What could the government do in period 3 to satisfy its intertemporal budget constraint? Be specific. c.

Answer 1

a) to satisfy the intertemporal budget constraint the government should reduce the government purchase of goods and services in period 1 by exactly $800b.

b) to satisfy the intertemporal budget constraint the government should either increase the net tax T2 or reduce G3, keeping other things constant.

c) to satisfy the intertemporal budget constrain the government should either increase the net tax T3 or reduce G3.

a), b), c) should be done such that the value of RHS remains unaltered.