Explain why the timing of taxes is irrelevant

Reference no: EM132150210

Question: Use the spreadsheet on Ricardian equivalence with three periods and assume that - the government spendings are 100, 150 and 150; - households' salary is 300 in each period. Also assume that households preper smoothed consumption and there is no discounting.

a. Assume that the government imposes equal (in each period) taxes to finance all spendings. For each period, determine the government bond issuances and repayments, households' disposable income, consumption and savings.

b. Assume that the government cannot issue debt or save and finances its spendings by taxes only. For each period, determine households' disposable income, consumption and savings with perfect consumption smoothing.

c. Using the results in (a) and (b) explain why the timing of taxes is irrelevant (the Ricardian equivalence result).

Reference no: EM132150210

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