Discussion on Macroeconomic theory

Econ320 Macroeconomic theory–(Ricardian Equivalence Theorem&dynamic model)
Please answer question 1 and 2 in this assignment, I attached the slides below about Ricardian equivalence model and the article needed for question 1, and the slides about dynamic model for question 2 as well.

 

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Econ 320 Topic 8: Incorporating Government into
the Dynamic Model
Williamson Textbook Chapter 9 and Chapter 15, Sections 1-3
Andolfatto Textbook Chapter 6, 142-152
I. Objectives

II. Data
Figure 1: Canadian Government Budget (100,000’s)
Canada’s government budget deficit widened sharply to CAD 21.94 billion in August of 2020 from CAD
3.67 billion in the same month of the previous year, reflecting the economic downturn and temporary
measures implemented through the government’s Economic Response Plan to support Canadians and
businesses facing hardship as a result of the coronavirus pandemic. Revenues declined by CAD 1.3
billion, or 5.4 percent to CAD 23.26 billion, due to decreases in other revenues. Meanwhile, program
expenses soared by CAD 16.3 billion, or 61.4 percent to CAD 42.92 billion, driven by increased transfers
to individuals, businesses, and other levels of government as part of COVID-19 response measures.
Public debt charges rose CAD 0.6 billion, or 35.6 percent to CAD 2.28 billion, reflecting higher Consumer
Price Index adjustments on Real Return Bonds. source: Department Of Finance Canada (https://www.canada.ca)
Actual Previous Highest Lowest Dates Unit Frequency
-21937.00 -28228.00 5770.00 -43932.00 1985 –
2020
CAD
Million
Monthly Current Prices,
NSA
1Y 5Y 10Y MAX
Canada Government Budget Value
Summary Calendar Forecast Stats Download () Alerts
Canada Government Budget Value | 1985-2020 Data | 2021-2022 Forecast… https://tradingeconomics.com/canada/government-budget-value
1 of 7 2020-11-02, 8:21 p.m.
Figure 2: Canadian Government Debt (Billions)
Government Debt in Canada increased to 685.45 CAD Billion in 2019 from 671.25 CAD Billion in 2018.
source: Department of Finance Canada (https://www.fin.gc.ca/fin-eng.asp)
Actual Previous Highest Lowest Dates Unit Frequency
685.45 671.25 685.45 14.83 1962 – 2019 CAD Billion Yearly
Canada Government Last Previous Highest Lowest Unit
Government Debt to GDP
(/canada/governmentdebt-to-gdp)
89.70 90.10 100.20 44.90 percent [+] (/canada
/government-debtto-gdp)
10Y 25Y MAX
Canada Government Debt
Summary Forecast Stats Download ()
Canada Government Debt | 1962-2019 Data | 2020-2022 Forecast | Histo… https://tradingeconomics.com/canada/government-debt
1 of 7 2020-10-31, 1:12 p.m.

Figure 3: Canadian Government Debt as a % of GDP
Canada recorded a government debt equivalent to 89.70 percent of the country’s Gross Domestic
Product in 2018/2019 fiscal year. source: Department of Finance Canada (https://www.fin.gc.ca/fin-eng.asp)
Actual Previous Highest Lowest Dates Unit Frequency
89.70 90.10 100.20 44.90 1980 – 2018 percent Yearly
Canada Government Last Previous Highest Lowest Unit
Government Debt to GDP
(/canada/governmentdebt-to-gdp)
89.70 90.10 100.20 44.90 percent [+] (/canada
/government-debtto-gdp)
10Y 25Y MAX
Canada Government Gross Debt to GDP
Summary Forecast Stats Download ()
Canada Government Gross Debt to GDP | 1980-2018 Data | 2019-2020 F… https://tradingeconomics.com/canada/government-debt-to-gdp
1 of 7 2020-10-31, 1:14 p.m.
III. Dynamic Model with Government
A. Review of Basic Dynamic Model

B. Incorporating Government
C. Private, Public, and National Savings and the Trade Balance
(1). Households and Private Savings
(2). Government and Public Savings
(3). National (Aggregate) Savings
(4). The Trade Balance
IV. Closed Economy
No International Trade
Autarky
A. National Savings must equal zero
B. The household and the government may borrow and lend
with each other

V. Small Open Economy (SOE)
A. Government Budget Constraints

B. Household Budget Constraints

C. National or Aggregate Lifetime Budget Constraint

D. Households’ Optimization Problem
(1). Problem
(2). Solution
(3). Graphics
(4). Example
U (C1, C2) = ln(C1) + 0.25 ln(C2)

VI. National Savings as a Function of the Interest Rate
A. Substitution Effect
B. Income Effect
C. Combining Effects

D. Example
U(C1, C2) = ln(C1) + 0.25 ln(C2)
CD
1 = .8 (Y1 T1) + .8 Y2R T2 !
CD
2 = .2R (Y1 T1) + .2 (Y2 T2)
SP
1 = .2 (Y1 T1) .8 Y2R T2 !
T B1 = .2Y1 + .8T1 .8 Y2T2
R ! G1

E. Graphics of the National Savings Function
VII. Interest Rate Shocks

VIII. Productivity Shocks
A. Transitory Productivity Shocks

B. Anticipated Productivity Shocks

C. Permanent Productivity Shocks

IX. Tax Shocks, Holding Government Spending Fixed
A. Introduction
B. Effect on Government Savings (Public Savings)
C. Effect on Household Consumption and Household Savings
(Private Savings)

D. Effect on National Savings and the Trade Balance
E. The Ricardian Equivalence Theorem
(1). The Theorem
Under certain conditions, there are many combinations of
lump-sum tax levels and government surpluses or deficits
that can finance constant levels of government spending
and lead to the same household consumption levels and
household welfare.
(2). Graphics

(3). What are the “certain conditions”?
F. A Policy Implication of the Ricardian Equivalence Theorem
G. Example (From Above)
U(C1, C2) = ln(C1) + 0.25 ln(C2)
CD
1 = .8 Y1 + Y R 2 ! .8 T1 + T R 2 !
CD
2 = .2 (RY1 + Y2) .2 (RT1 + T2)
SP
1 = .2Y1 .8 Y R 2 ! .2T1 + .8 T R 2 !
T B1 = .2Y1 .8 Y2
R ! + .8 T1 + T R 2 ! G1

X. Government Spending Shocks
A. Introduction
B. Increase in government spending in first period

C. Increase in government spending in second period

D. Example
U(C1, C2) = ln(C1) + 0.25 ln(C2)
CD
1 = .8 Y1 + Y R 2 ! .8 T1 + T R 2 !
CD
2 = .2 (RY1 + Y2) .2 (RT1 + T2)
SP
1 = .2Y1 .8 Y R 2 ! .2T1 + .8 T R 2 !
T B1 = .2Y1 .8 Y2
R ! .2T1 + .8 T R 2 !
XI. Summary of Effects of Shocks

XII. Incorporating Leisure into the Dynamic Model
A. Government Budget Constraints
B. Households
(1). Lump-Sum Taxation
(a). Households’ Lifetime Budget Constraints
(b). Households’ Utility Maximization Problems
(c). Households’ Optimal Equations
(d). Ricardian Equivalence Result Does Hold
(2). Proportional Income Taxation
(a). Households’ Lifetime Budget Constraints
(b). Households’ Utility Maximization Problems
(c). Households’ Optimal Equations
(d). Ricardian Equivalence Result Does NOT Hold
C. Business Cycle Implications

 

20201117045646econ_320_assignment_four___f2020 20201117045703article_for_q1__cd_howe_media_release_canada_in_economic_and_fiscal_fog_oct_20_2020

 

 

 

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