Exercise 17: Impact of fiscal policy. Consider the case of an individual that lives for two periods, and has preferences: U (C, C++1) = In (c) + 0.8 In (C++1). This individual has an income of $5,000 in period t and $2,000 in period t+1. There are no other sources of income. There is one asset that provides an interest rate of 4%. (a) Write down the budget constraint in periods t and t +1. (b) Consolidate the two budget constraints into the Intertemporal Budget Constraint and solve the maximization problem of this household. Suppose now that the government spends $1,500 in period t and $1,000 in period t + 1. The government can set up the taxes it wants in the two periods and can issue debt that also pays an interest rate of 4%. (C) Write down the budget constraints of the government in periods t and t+1. Compute the Intertemporal Budget Constraint of the government. (d) How do the budget constraints of the individual change depending on the tax policy chosen by the government? What about the Intertemporal Budget Constraint? (e) Discuss the impact of different fiscal policies to finance government expenditure on the individuals decisions. Exercise 17: Impact of fiscal policy. Consider the case of an individual that lives for two periods, and has preferences: U (C, C++1) = In (c) + 0.8 In (C++1). This individual has an income of $5,000 in period t and $2,000 in period t+1. There are no other sources of income. There is one asset that provides an interest rate of 4%. (a) Write down the budget constraint in periods t and t +1. (b) Consolidate the two budget constraints into the Intertemporal Budget Constraint and solve the maximization problem of this household. Suppose now that the government spends $1,500 in period t and $1,000 in period t + 1. The government can set up the taxes it wants in the two periods and can issue debt that also pays an interest rate of 4%. (C) Write down the budget constraints of the government in periods t and t+1. Compute the Intertemporal Budget Constraint of the government. (d) How do the budget constraints of the individual change depending on the tax policy chosen by the government? What about the Intertemporal Budget Constraint? (e) Discuss the impact of different fiscal policies to finance government expenditure on the individuals decisions