Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Exercise 1. Distortionary taxes [46 points] Consider a small open economy with 2 periods. There is a single non-storable good. Pref- erences of the representative

image text in transcribed
Exercise 1. Distortionary taxes [46 points] Consider a small open economy with 2 periods. There is a single non-storable good. Pref- erences of the representative household are described by the following utility function: U(C1, C2) = In C1 + In C2. In period 1 and 2 households receive an endowment of Q1 = Q2 = 10. In period 1, households also pay a proportional tax on consumption To, and a proportional tax on their endowment To. In period 2, households don't pay taxes. Households are born with zero initial financial assets, Bo = 0. They have unrestricted access to international credit markets a the international interest rate "* = 0. In both periods the government consumes a constant level of expenditure G1 = G2 = 1. The government has unrestricted access to the world financial markets. The initial financial position of the government is zero, Bo = 0. e (a) [8 points] Set up the budget constraint of households for periods 1 and 2. Derive the inter-temporal household budget constraint. (b) [8 points] Set up the budget constraint of the government for periods 1 and 2. Derive the inter-temporal government budget constraint. (c) [12 points] Suppose To = 0. Find the equilibrium levels of consumption C1, C2, tax on endowments To, the current account in period 1 and the level of utility attained by households. (d) [12 points] Now suppose To = 0. Find the equilibrium levels of consumption C1, C2, tax on consumption To, the current account in period 1 and the level of utility attained by households. (e) [6 points] Compare the levels of utility obtained by the household in the last two parts. Provide intuition for your results

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Classics In Game Theory

Authors: Harold William Kuhn

1st Edition

1400829151, 9781400829156

More Books

Students also viewed these Economics questions

Question

Is there something else less expensive that would be just as good?

Answered: 1 week ago