Consider an economy of altruistic two-period-lived people who care about the utility of their children. Children do not care about the utility of their parents. Parents currently leave a bequest worth 50 goods. For each of the following policies, find the size of the bequest in period 1 and the effect of this policy on the capital stock.
a. The government decreases taxes paid by each old person in period 1 by 40 goods, running a deficit that will be paid off with taxes imposed on those old in period 3.
b. The government increases taxes paid by each old person in period 1 by 40 goods, running a deficit that will be paid off with taxes imposed on those old in period 3.
c. The government increases taxes paid by each old person in period 1 by 70 goods, reducing a national debt that will be paid off in full with taxes imposed on those old in period 3.