ADVANCE MACROECONOMICS

Problem 2. Tax smoothing during temporary recession [10 points] Consider the Barro tax-smoothing model. Suppose that the real interest rate, r, is constant, and that the level government debt outstanding at time t=0 is zero. Suppose also that the government expenditure is constant over time, i.e. G(t) = G. Regarding output Y, let us assume that from time 0 to time r , that will be at a low value of Y, , and after that high value of Y,, i.e. where Y,