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Macroeconomics Problem Help!

  1. Dec 6, 2012 #1
    Hey can anyone provide any help with this economics problem? Thank you!

    Suppose there is a credit market imperfection due to limited commitment. As in the limited
    commitment model, each consumer has a component of wealth that has
    value pH in the future period, cannot be sold in the current period, and can be pledged
    as collateral against loans. Suppose that the government requires each consumer to pay a
    lump-sum tax t in the current period, and a tax t0 in the future period. Also suppose that
    there is limited commitment with respect to taxation as well. That is, if a consumer refuses
    to pay his or her taxes, the government can seize the consumer's collateralizable wealth, but
    cannot con scate income (the consumer's endowment). Assume that, if a consumer fails to
    pay o his or her debts to private lenders, and also fails to pay taxes, the government has
    to be paid rst from the consumer's collateralized wealth.

    1. Show how the limited commitment problem puts a limit on how much the government
    can spend in the current and future periods.
    2. Write down the consumer's collateral constraint, taking into account the limited com-
    mitment problem with respect to taxes.
    3. Draw the consumer's lifetime budget constraint.
    4. Suppose now that the government reduces t and increases t0 so that the government
    budget constraint continues to hold. What will be the e ects on an individual con-
    sumer's consumption in the present and the future? Does Ricardian equivalence hold
    in this economy? Explain why or why not.
    Hint: It may be useful to see how the tax change a ects a consumer that is
    initially not a ected by the collateral constraint and one who is separately.
  2. jcsd
  3. Dec 6, 2012 #2


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    Staff: Mentor

    Please repost this in the Other Scences section of the homework forums, and use the template, showing what you have done to answer this yourself. Thanks.
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