Consumption Expenditures and Private Saving Discussion
Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages Description/Paper Instructions
Consumption Expenditures and Private Saving Discussion
Again, assume that the marginal propensity to consume out of permanent income equals 0.9 and the…
Again, assume that the marginal propensity to consume out of permanent income equals 0.9 and the marginal propensity to consume out of transitory income equals 0.1. However, instead of a one-time increase in taxes, the infrastructure spending is financed by issuing a ten-year bond at the beginning of the first year. Taxes are then raised in each of the ten years to raise enough funds to retire the bond at the end of the ten years. Permanent income is reduced in each year by the amount of the tax increase in that year.
The tax increases necessary to be able to retire the bond are: $15.33 billion in year 1; $15.79 billion in year 2; $16.26 billion in year 3; $16.75 billion in year 4; $17.25 billion in year 5; $17.77 billion in year 6; $18.30 billion in year 7; $18.85 billion in year 8; $19.42 billion in year 9; and $20.00 billion in year 10. (These are net tax increases in that it is assumed that the debt is purchased domestically. Therefore any interest expense paid by taxpayers is offset as income received by taxpayers.) (a) Verify that the future value of each year’s tax increase in year 10 is $20 billion, given that the real interest rate the government can borrow at equals 3 percent. (Remember that the first year’s tax increase can earn interest in years 2 through 10; the second year’s tax increase can earn interest in years 3 through 10; and so on.) (b) Compute the amounts of consumption expenditures and private saving in each of the ten years, given that the tax increase
Consumption Expenditures and Private Saving Discussion
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