Question
In: Economics
Suppose that the government introduces a tax on interest earnings . That is, borrowers face a...
Suppose that the government introduces a tax on interest earnings .
That is, borrowers face a real interest rate of r before and after
the tax is introduced , but lenders receive an interest rate
of(1-x) on their savings, where x is the tax rate . Therefore , we
are looking at effects of having x increase from zero to some value
greater than zero , with r assumed to remain constant .
A. Show the effects of the increase in the tax rate on a
consumer’s lifetime budget constraint.
B. How does the increase in the tax rate affect the optimal
choice of consumption ( in the current and future periods) and
saving for the consumer? Show how income and substitution effects
matter for your answer, and show how it matters whether the
consumer is initially a borrower or a lender.
Solutions
Rahul Sunny answered 2 years agoRelated Solutions
Suppose that the government introduces a tax on interest earnings. That is, borrowers face a real...
Suppose that the government introduces a tax on interest
earnings. That is, borrowers face a real interest rate of r before
and after the tax is introduced, but lenders receive an interest
rate of (1-x)r on their savings, where x is the tax rate.
Therefore, we are looking at the effects of having x increase from
zero to some value greater than zero, with r assumed to remain
constant.
a) Show the effects of the increase in the tax rate...
Suppose that the government introduces a tax on interest earnings. That is, borrowers face a real...
Suppose that the government introduces a tax on interest
earnings. That is, borrowers face a real interest rate of r before
and after the tax is introduced, but lenders receive an interest
rate of (1-x)r on their savings, where x is the tax rate.
Therefore, we are looking at the effects of having x increase from
zero to some value greater than zero, with r assumed to remain
constant.
a) Show the effects of the increase in the tax rate...
2. Suppose that your government introduces an investment tax credit, which subsidizes domestic investment. How does...
2. Suppose that your government introduces an investment tax
credit, which subsidizes domestic investment. How does this policy
affect national saving, domestic investment, net capital outflow,
the interest rate, the exchange rate, and the trade balance?
8. Suppose that your countrymen decide to increase their saving. a.
If the elasticity of net capital outflow with respect to the real
interest rate is very high, will this increase in private saving
have large or small effect on domestic investment? b. If...
Suppose that your local government, threatened by bankruptcy, decides to tax the interest income on its...
Suppose that your local government, threatened by bankruptcy,
decides to tax the interest income on its own bonds as part of an
effort to rectify its budgetary woes. If bondholders care about
their after-tax returns, what would you expect to happen to the
prices of local municipal bonds? To their yields? Explain
Consider the markets for low-skilled and high-skilled labor. a. Suppose the government introduces a subsidy to...
Consider the markets for low-skilled and high-skilled labor.
a. Suppose the government introduces a subsidy to the
employment of low-skilled workers physically paid to firms. (For
simplicity, assume the government pays firms some amount for each
low-skilled worker they hire.) How will the subsidy affect the
employment of low-skilled workers, the wage low-skilled workers
receive, and net of-subsidy wage for low-skilled workers paid by
firms? Will this policy tend to increase, decreaseor have no effect
on income inequality (or is...
Consider the markets for low-skilled and high-skilled labor. a. Suppose the government introduces a subsidy to...
Consider the markets for low-skilled and high-skilled labor.
a. Suppose the government introduces a subsidy to the employment
of low-skilled workers physically paid to firms. (For simplicity,
assume the government pays firms some amount for each low-skilled
worker they hire.) How will the subsidy affect the employment of
low-skilled workers, the wage low-skilled workers receive, and the
netof-subsidy wage for low-skilled workers paid by firms? Will this
policy tend to increase, decrease, or have no effect on income
inequality (or...
Suppose you are advising the government on sales tax. Should the government tax inelastic goods such...
Suppose you are advising the government on sales tax. Should the
government tax inelastic goods such as food and medicine or
inelastic goods such as Netflix and Hulu subscriptions if the goal
of the tax is not to be distortionary? (In which scenario would the
tax have the smallest effect on quantity).
Suppose the Australian government introduces a new anti-drug policy that: 1) imposes stiffer penalties on individuals...
Suppose the Australian government introduces a new anti-drug
policy that: 1) imposes stiffer penalties on individuals who sell
and manufacture drugs in Australia and 2) stems the flow of illegal
drugs from other countries into Australia.
A) Using a supply and demand diagram, show how this policy is
likely to affect the equilibrium price and quantity of drugs in
Australia. Be sure to label both axes, the supply curve, the demand
curve, any shifts in either curve induced by the...
Suppose that in the market for coffee, the government decides to impose a tax on the...
Suppose that in the market for coffee, the government decides to
impose a tax on the consumption of coffee.
Illustrate the equilibrium market for coffee reflecting the new
tax.
On your graph, label the new price that consumers pay as Pc
On your graph, label the new price that sellers receive as
Ps
On your graph, shade in the area representing the tax revenue
received by the government and label it (TR).
On your graph, shade in the area of...
A tax on hamburgers Suppose a state government imposes a tax on sales of hamburgers. Before...
A tax on hamburgers
Suppose a state government imposes a tax on sales of hamburgers.
Before the tax, 16 million hamburgers were sold at $3.25 per
hamburger. With the tax in effect, 14 million hamburgers are sold,
buyers pay $3.75 per hamburger, and sellers receive $3.00 per
hamburger.
In the scenario above, what is the tax ($ per hamburger)?
In the scenario above, what is the tax incidence that falls on
the sellers of hamburgers? ($ per six pack)?
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