3. (20 points) Use the spreadsheet on Ricardian equivalence with three periods and assume that the government spendings are 100, 150 and 150. Also assume that households' salary is 300 in each period. Households prefer smoothed consumption and there is no discounting a. Assume that in each period the government imposes equal taxes to finance the spendings. For each period, determine the government bond issuances and repayments, households' disposable income, consumption and savings b. Assume that the government cannot issue debt or save and finances its spendings by taxes only. For each period, determine households' disposable income, consumption and savings with perfect consumption smoothing. e. Using the results in (a) and (b) explain why the timing of taxes is irelevant (the Ricardian equivalence result) RicardianEquivalence2019 (11.xlsx Done Disposable Consumption Government Government Gov. savings savings MPC Savings Period Tax (1) Salary Savings account income spending position 94 100 -94 300 294 294 0 0 6 2 150 -144 -238 300 294 294 0 6 150 -382 300 294 294 6 -144 -382 882 882 Total 400 18 900 Myopic consumption consumption Savings/borrowings Savings/borrowings Government Gov. savings Disposable position Smoothed Gevernment Period Tax (2) spending savings Income position 100 92 92 292 292 294 2 -2 294 296 2 294 150 144 236 294 o -2 6 3 150 4 146 382 296 294 0 400 382 882 882 882 C Total 18 Myopic consumption is based on the first year MPC (the consumer does not realize that the tax will be lower in the next periods) Smooth consumption is determined as total disposable income devided by the number of periods 294 3. (20 points) Use the spreadsheet on Ricardian equivalence with three periods and assume that the government spendings are 100, 150 and 150. Also assume that households' salary is 300 in each period. Households prefer smoothed consumption and there is no discounting a. Assume that in each period the government imposes equal taxes to finance the spendings. For each period, determine the government bond issuances and repayments, households' disposable income, consumption and savings b. Assume that the government cannot issue debt or save and finances its spendings by taxes only. For each period, determine households' disposable income, consumption and savings with perfect consumption smoothing. e. Using the results in (a) and (b) explain why the timing of taxes is irelevant (the Ricardian equivalence result) RicardianEquivalence2019 (11.xlsx Done Disposable Consumption Government Government Gov. savings savings MPC Savings Period Tax (1) Salary Savings account income spending position 94 100 -94 300 294 294 0 0 6 2 150 -144 -238 300 294 294 0 6 150 -382 300 294 294 6 -144 -382 882 882 Total 400 18 900 Myopic consumption consumption Savings/borrowings Savings/borrowings Government Gov. savings Disposable position Smoothed Gevernment Period Tax (2) spending savings Income position 100 92 92 292 292 294 2 -2 294 296 2 294 150 144 236 294 o -2 6 3 150 4 146 382 296 294 0 400 382 882 882 882 C Total 18 Myopic consumption is based on the first year MPC (the consumer does not realize that the tax will be lower in the next periods) Smooth consumption is determined as total disposable income devided by the number of periods 294
