With reference to the simple life-cycle model discussed in lectures (no

population growth, no productivity growth), suppose the economy is initially in a

steady state with a constant capital-labour ratio in period 1. Briey describe how

a proportional tax applied to consumption of both young and old generations,

announced and introduced in period 2, and that remains in all future periods,

affects the economy. Who is better off and who is worse off from this policy

change? When discussing your answer, assume the revenue from the tax is used

for government consumption only (and assume government consumption is exempt

from the tax).