Fiscal Policy in the Two-Period Economy Consider the two-period economy with government. Neither the representative consumer nor the government start their lives with any assets (that is, both a0 = 0 and 0 b = 0 ). All taxes that the government levies are lump-sum. In each period, the government has positive government spending (i.e., both g1 > 0 and g2 > 0). The real interest rate between period one and period two is zero (i.e., r = 0), and there are no credit constraints whatsoever. Finally, suppose that the government lives for the entire two periods, and, until part c below, so does the representative consumer.
a. Suppose that the government is currently planning to collect t1 = 3 and t2 =5 in taxes in period one and period two, respectively. A policy change is proposed, however, that would reduce period-one taxes to t1 = 2 without changing either g1 or g2. If this policy change is enacted, is it possible to numerically compute the amount of tax collections that the government will require in period two? If so, compute it; if not, explain why not.