1. Consider the inter-temporal budget constraint for the government and consumers. Assume the interest rate is...

1. Consider the inter-temporal budget constraint for the government and consumers. Assume the interest rate
is r= 5%.
(a) Suppose the government cuts taxes today by $100 billion. Describe three possible ways the government can change spending and taxes to satisfy its budget constraint.
(b) Suppose consumers obey the permanent-income hypothesis. Would their consumption rise, fall, or stay the same for each of the alternatives considered in part (a)?
(c) What happens to private saving, total saving, and investment in the three scenarios? Why? (Assume foreign saving does not change.)

Expert Solution

Rahul Sunny answered 2 years ago

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