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Consider a two period model, populated by a representative consumer and a government. The consumer's preferences can be described by the utility function: u(c0, c1)
Consider a two period model, populated by a representative consumer and a government. The consumer's preferences can be described by the utility function:
u(c0, c1) = ?c0 + ??c1,
where ? = 0.95 captures the consumer's preference for the future. The consumer has an income y0=20 in the current period and expect a future income y1 = 25. The government plans to spend G0 = 5 in the current period and G1 = 7. The interest rate is r = 10% in the economy.
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