ECON 102 Lecture Notes - Lecture 10: Ricardian Equivalence
Document Summary
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.
