goods market 2 & 3

Question 1

P1 budget constraint of govt

Answer 1

G1=T1+B1

Question 2

P2 budget constraint of govt

Answer 2

G2=T2-(1+r)B1 = T2-(1+r)(G1-T1)

Question 3

relate govt spending to lump sum taxes

Answer 3

G1+G2/(1+r) = T1 + T2/(1+r)

Question 4

P1 budget constraint of indiv

Answer 4

S1=(y1-t1)-c

Question 5

P2 budget constraint of indiv

Answer 5

c2 = (y2-t2) + (1+r)((y1-t1)-c)

Question 6

relate consumption to income of indivs

Answer 6

c1 + c2/1+r = y1 + y2/1-r - (t1 + t2/1+r)

PVLC = PV(income) - PV(taxes)

Question 7

increase G impact on Cd and Sd

Answer 7

large increase in G, smaller fall in Cd (xMPC) so overall fall in Sd

increase G financed by
1. increase in current T
2. increase in future T

both leads to fall in cd today

Question 8

Ricardian equivalence

Answer 8

fall in taxes today accompanied by offsetting increase in expected future taxes

if govt spending is unchanged, if T1 falls by change in T, T2 must rise by (1+r)change in T = PV(taxes) before tax cut

Question 9

main reasons why RE fails

Answer 9

1. borrowing constraints
2. shortsightedness
3. failure to leave bequests
4. non lump sum tax

Question 10

profit of firm in P1

Answer 10

PIt = Yt - wtNt - It

Question 11

eqn of motion for capital

Answer 11

Kt+1 = (1-d)Kt + It

Question 12

gross I =

Answer 12

gross I = net I + depreciation

I1 = K2-K1 + dK1

Question 13

profit max problem of firms

Answer 13

A1F(K1, N1) - w1N1 - (K2-K1+dK1)
+
1/(1+r) [A2F(K2,N2) - w2N2 + (1-d)K2

Question 14

FOC of profit max problem of firms

Answer 14

1. diff. with N1
   MPN1 = w1
2. diff w N2
   MPN2=w2
3. diff w K2
   MPK^f = uc = r+d

Question 15

user cost of capital

Answer 15

sum of depreciation and interest cost
(r+d)Pk

Question 16

plot MPK^f against K

Answer 16

uc is a horizontal line, MPKf is downward sloping

max profits at MPKf=uc

Question 17

factors that shift MPKf and uc

Answer 17

1. real i/r
   lower r leads to fall in uc, increase in K
2. depreciation rate d
3. Pk
4. tech changes (affect MPKf)
   - tech advance shift MPKf upwards, increase in K

Question 18

relate after tax MPKf to uc

Answer 18

return to capital becomes (1-t)MPKf

SO MPKf = (r+d)Pk/(1-T)

Question 19

Kt+1=K* (instantaneous adjustment)

Answer 19

It = K* - Kt + dkt

Question 20

budget constraint after dividends

Answer 20

c2= y2 + pi2 - t2 + (1+r)(y1+pi1 - t1- c1)

Question 21

dividends budget constraint

Answer 21

PV(consumption) = PV (income) + PV(dividends) - PV(taxes)

Question 22

goods mkt eqm condition

Answer 22

1. Y= Cd + Id +G
2. Sd = Id

if goods supplied< goods demanded, r will rise s.t. Sd rises as Cd falls, and Id falls

Question 23

factors that shift savings curve

Answer 23

1. current output
2. expected future output
3. wealth
4. govt purchases
5. taxes

Question 24

factors that shift investment curve

Answer 24

1. effective tax rate
2. MPKf

Question 25

crowding effect

Answer 25

increase in G, fall in Sd since Sd = Y-Cd-G
increase in r to clear loanable funds mkt, fall in Sd and Id in eqm