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In: Economics

Assume an economy with 1000 consumers. Each consumer has income in the current period of 50...

Assume an economy with 1000 consumers. Each consumer has income in the current period of 50 units and future income of 60 units and pays a lump-sum tax of 10 units in the current period and 20 units in the future period. The market real interest rate is 8%. Of the 1000 consumers, 500 consume 60 units in the future, while 500 consume 20 units in the future.

(a) Determine each consumer’s current consumption and current saving

(b) Determine aggregate private saving, aggregate consumption in each period, government spending in the current and future periods, the current-period government deficit, and the quantity of debt issued by the government in the current period

Solutions

Expert Solution

ANSWER:-

A) Each consumer’s current consumption and current saving.

  • There are two sorts of individuals, first sort who expend 60 units in future and second sort who devours 20 units later on. There are 500 customers of type 1 and 500 purchasers of type 2.
  • Decide every purchaser's present utilization and current reserve funds.
  • Salary is 50 units now, 60 units later.
  • Duties are 10 units now, 20 units later. (note;
  • Salary - Taxes = Disposable Income.
  • Extra cash is 40 units now, 40 units later.

Type 1.

  • Future utilization: 60 units.
  • Absolute utilization = current utilization + future utilization
  • (50-10) + (60-20) = current utilization + 60
  • 80 = current utilization + 60
  • Current utilization = 20
  • Current reserve funds = (50-10) - 20 = 20

Type 2.

  • Future utilization: 20 units.
  • Absolute utilization = current utilization + future utilization
  • (50-10) + (60-20) = current utilization + 20
  • 80 = current utilization + 20
  • Current utilization = 60
  • Current reserve funds = (50-10) - 60 = - 20

B) Aggregate private saving, aggregate consumption in each period, government spending in the current and future periods, the current-period government deficit, and the quantity of debt issued by the government in the current period.

Total private reserve funds:

  • APS = 20*500 - 20*500 = 0

Total utilization :

  • Period 1: 500*20 + 500*60 = 40,000
  • Period 2: 500*60 + 500*20 = 40,000

Total salary:

  • Period 1: 40*500 + 40*500 = 40,000
  • Period 2:40*500 + 40*500 = 40,000

Government spending:

  • Period 1: 40,000 - 40,000 = 0
  • Period 2: 40,000 - 40,000 = 0

Tax assessment:

  • Period 1: 1000*10 = 10,000
  • Period 2 : 1000*20 = 20,000
  • Along these lines, the administration runs an overflow of 10,000 in the main time frame and 20,000 in the subsequent period.

Rahul Sunny answered 7 months ago
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