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#### Government spending in one-period closed-economy model Assume a one-period closed-economy model with Consumer, Firm and Government

###### Economics

Government spending in one-period closed-economy model Assume a one-period closed-economy model with Consumer, Firm and Government. Consumer's utility maxi- mization problem over consumption c and leisure l is given as: max U(0,1) subject to budget constraint C= w[h - 1] +T-T And firm's profit maximization problem is given as max = 2N® – WN N where N = h-1. Government runs a balanced budget G =T Q1 Characterize graphically the competitive equilibrium of this economy. In particular draw the indifference curve, and production possibilities frontier onto {c,l} – space. Show where the equilibrium is. Q2 Characterize graphically the equilibrium effects of a positive government spending shock (an increase in G Q3 Assume a natural logarithmic utility function Uc, 1) = Inc+ a Inl where a > 0. Solve the equilibrium of this economy analytically. What is the response of c to an increase in G? (hint: take partial derivative)