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 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.

Expert Solution

Rahul Sunny answered 2 years ago

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...

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...

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 that the nominal interest rate is 4.2%, the real interest rate is 2.8%, real GDP...

Suppose that the nominal interest rate is 4.2%, the real interest rate is 2.8%, real GDP grows at 1%, and this year's money supply is $11.438B. To the nearest million, the size of next year's money supply will be $________B.

If the tax rate is 40 percent, compute the before-tax real interest rate and the after-tax...

If the tax rate is 40 percent, compute the before-tax real interest rate and the after-tax real interest rate. (answer in percentages. If whole percentages, do not need decimals. If have decimals, round to nearest hundredth of percent) Show all steps clearly assume multiplying percentages by $100 before-tax real interest rate = nominal interest rate - inflation rate reduction in nominal interest = nominal interest rate multiplied by tax rate after-tax nominal interest rate = nominal interest rate - reduction...

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...

Question

Suppose that the government introduces a tax on interest earnings. That is, borrowers face a real...

Solutions

Expert Solution

Related 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...

2. Suppose that your government introduces an investment tax credit, which subsidizes domestic investment. How does...

Suppose that your local government, threatened by bankruptcy, decides to tax the interest income on its...

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...

Suppose you are advising the government on sales tax. Should the government tax inelastic goods such...

Suppose that the nominal interest rate is 4.2%, the real interest rate is 2.8%, real GDP...

If the tax rate is 40 percent, compute the before-tax real interest rate and the after-tax...

Suppose the Australian government introduces a new anti-drug policy that: 1) imposes stiffer penalties on individuals...