Econ quiz

Exercise 12.1 {Easy} For each of the following questions provide a brief answer. 1. (True, False or Uncertain} All things being equal, there is more total savings under a funded than under an unfunded pension system. 2. For the 1.1.5., at the moment, is n :r r? 3. Name three items in die Federal budget that account for more than 20% of all gov- ernment expenditures (each). Exercise 12.2 {Easy} Assume that every dollar spent by the government augments total output by (p, where D e d: -:: 1. Assmne that total private output is fixed at Y and that the goverrunent pays for its expenditures with lump-sum taxes. What is the absolute maximum amount of government spending, (3"? At this level, how much does the household mnsume and invest? Exercise 12.3 [Moderate] For this exercise assume that the representative household lives for only two periods and has preferences over consumption streams {0.3, 0;} given by: UiCIJl + #313101}: where t? = 1,11 + p] and p :r I]. Here assume mat L\" :3 D, U" 4:: D. The household has a constant endowment stream {K Y} which is not affected by government spending. Any government spending must be paid for by lump-sum taxes on the representative house- hold. There is no capital stock. This is a closed economy. Answer the following questions: 1. Assume that me government spends die same amount (3' each period. What is the market-dearing interest rate, Tn? Exercises 129 2. Assume that the government spends different amounts in each period, {G3, G1} and mat GE. 3. G]. Now what is the market-clearing interest rate r3? 3. lNhieh is greater, TE or Tn? Does this fit with your intuition about the effect of tempo- rary govertunent spending? Exercise 13.3 (Moderate) The representative household lives for one period and has preferences over consumption C and labor supply L as follows: U(C, L) = 2VC - L. The government levies a flat tax at rate 7 and a lump-sum tax of S. Money spent on the lump-sum tax is exempt from the flat tax (that is, the lump-sum tax is paid with pre-tax dollars). The household can transform labor effort into the consumption good at a rate of one-to-one (the wage rate is unity). Answer the following questions: 1. What are the parameters of this tax system? What is the action chosen by the house- hold? 2. Write down the tax system function H(a; )) in this case (replace a with the house- hold's action and : with the parameters of the tax system). 3. If the household works some amount L, write down its tax bill. 4. Write down the household's consumption as a function of L, T and S. 5. Solve the household's problem. What is L(T, S)? 6. Find the government's revenue function T(). Exercise 13.4 (Easy) Assume that a household lives for one period and has preferences over consumption cand labor supply & as follows: AVC-1. The household earns a constant wage of w = 1 for each unit worked. There is a flat tax of rate 7. Answer the following questions: 1. Given that the household works an amount (, find the household's tax bill, H(6;T) and consumption, c(6, T). 2. Find the household's optimal choice of labor effort, ((T). 3. Find the government revenue function T(T). Exercises 151 4. The government wishes to raise an amount 3/4 in tax revenue from this household. Which tax rate(s) can the government use. Assume that the government is benevolent (that is, nice). Which tax rate does the government use?Exercise 14.3 (Easy) Assume that a household lives for two periods and has endowments in each period of (y1 = 1, y2 = 1 + r}. The household can save from period t = 1 to period t = 2 on a bond market at the constant net interest rate r. If the household wishes to borrow to finance consumption in period t = 1 and repay in period t = 2, it must pay a higher net interest rate of p' > r. The household has preferences over consumption in period t, q, of: V((a, 2)) = u(a) + u(cz). Assume that u' > 0 and u" 0 and 72 > 0. Draw a set of axes. Put consumption in period t = 2, , on the vertical axis and consumption in period t = 1 on the horizontal axis. Draw the household's budget set. 3. Now assume that 71 = 0 and 72 = (1 + r)G. Draw another set of axes and repeat the previous exercise. 4. Now assume that 71 = G and 72 = 0. Draw another set of axes and repeat the previous exercise. 5. What tax sequence would a benevolent government choose? Why? Exercise 14.4 (Easy) Assume that the government can only finance deficits with debt (it cannot print money, as in the chapter). Assume further that there is a constant real interest rate on government debt of r, and that the government faces a known sequence of real expenditures { G}fe. The government chooses a sequence of taxes that produces revenues of {7:}, such that: To = Go - 1, and: Ti = Gi, for all t = 1, 2, . .. , 00. Find the path of government debt implied by this fiscal policy. Does it satisfy the transver- sality condition? Why or why not