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Quick Econ Question


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Hey All,

First of all, I apologize that most of my posts on here are HW-help related. I read everything posted in the Skins forum, just not a poster really. You all are incredible though and love the site. I post this here cuz I know there's a few big Skins fan/econ majors who have helped in past. Really appreciate any help you can offer:

Assume the 2 period Fisher model, where gov't and household BOTH have to abide by 2-period budget constraints, and where there is no investment expenditure. You have following info:

Period 1/ Period 2

Consumption: 100/100

Income: 145/145

Taxes: 65/20

Suppose in order to stimulate the economy in period 1, the gov't cuts taxes in P1 to 0 (t goes from 65 to 0) with no change in government spending in either period. What is the effect on consumption in period 1?

Thanks again.

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I agree, but no, I don't really. TA's are incompetent nowadays (or maybe always?) and don't speak any English. Professor has 300 kids.

---------- Post added December-12th-2011 at 10:38 AM ----------

Explain the 2-period Fisher model.

Intertemporal budget constraint. The present value of lifetime consumption equals PV of lifetime income. aka:

C1 + C2/(1+r) = Y1 + Y2/(1+r)

so in summary:

Current consumption depends only on the PV of lifetime income. Timing of income is irrelevant b/c consumer can borrow or lend between periods.

In this case, the consumer's budget constraint w/ taxes is C2 = (Y2 - T2) + (1+r) (Y1-T1-C1)

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