Question

Assume an economy with 1000 consumers. Each consumer has income in the current period of 50 units and future income of 60 units and pays a lump-sum tax of 10 in the current period and 20 units in the future period. The market real interest rate is 8%. Of the 1000 consumers, 500 consume 60 units in the future, while 500 consume 20 units in the future.

a) Determine each consumer’s current consumption and current saving

Answer 1

There are two types of people, first type who consume 60 units in future and second type who consumes 20 units in the future. There are 500 consumers of type 1 and 500 consumers of type 2.

Determine each consumer’s current consumption and current savings.
Income is 50 units now, 60 units later.
Taxes are 10 units now, 20 units later. (note;
Income - Taxes = Disposable Income.
Disposable income is 40 units now, 40 units later.

Type 1.
Future consumption: 60 units.

Total consumption = current consumption + future consumption
(50-10) + (60-20) = current consumption + 60
80 = current consumption + 60
Current consumption = 20
Current savings = (50-10) - 20 = 20

Type 2.
Future consumption: 20 units.

Total consumption = current consumption + future consumption
(50-10) + (60-20) = current consumption + 20
80 = current consumption + 20
Current consumption = 60
Current savings = (50-10) - 60 = -20