ECON 102 Lecture Notes - Lecture 10: Ricardian Equivalence

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How to fund gvt expenditures for gvt to increase gdp (following the keynsian principle) Hayek replied yes you have no unemployment but nothing to eat. Working more -> more tax -> reduce incentive to work so (tau 1) it"s a distortonary tax. Want to work more to compensate gvt intervention -> poor -> don"t want to work as much. If gvt wants fiscal stimulus with labour taxes to improve production -> no increasing output -> makes everyone unhappy because everyone consumes less. This is a negative multiplier/ multiplier <0 (gvt expenditure doesn"t add to consumption, just reduces private consumption) V. high r needed to have low consumption in 1 and high consumption in 2 to be an equilbrium option. If r is 1/ beta -> want to consume more in t=1 and consume less in t=2 but this is not in line with equilbrium policy. Change equations that depend on tau, t, g.

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