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Economia V; Instructor: Marco Del Negro
Problem set 3
The setup of the problem is as follows:
- the economy has two periods, 1 and 2.
- there is only one agent in the economy, her income in periods 1 and 2 is
equal to Y1=2, Y2=0, respectively.
- The agent can borrow from or lend to international financial markets
at the world interest rate rw, which is 0%.
- the utility function of the agent is logarithmic, that is:
with
.
- the government is spending G1=.5 in the first period, G2=.5 in the
second period, and is taxing the individual in the first period only (T1)
for an amount that satisfies the intertemporal budget constraint of the
government.
a) Compute how much taxes T1 the government has to collect in the first
period in order to satisfy its intertemporal budget constraint.
b) Write the intertemporal budget constraint of the agent.
c) Solve the agent's problem and find the optimal consumption in periods 1
and 2 (C1 and C2).
d) Find the Current Account Surplus (Deficit) in the first period.
Marco Del Negro
2000-01-29