Consider our two-period model. Instead of having lump-sum taxes t, t', what if we have instead proportional taxes T, T' corresponding to current and future proportional taxes, respectively. A. B. C. Derive mathematically the lifetime budget constraint in this case. (Hint: From micro, what is a proportional tax?) What is the slope of the lifetime budget constraint? Explain briefly why the Ricardian equivalence theorem doesn't really apply in this case.

Consider our two-period model. Instead of having lump-sum taxes t, t', what if we have instead proportional taxes T, T' corresponding to current and future proportional taxes, respectively. A. B. C. Derive mathematically the lifetime budget constraint in this case. (Hint: From micro, what is a proportional tax?) What is the slope of the lifetime budget constraint? Explain briefly why the Ricardian equivalence theorem doesn't really apply in this case.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter24: Fiscal Policy

Section: Chapter Questions

Problem 5P

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