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  3. 2 capital tax in our two period consumptionsavings model suppose...

Question: 2 capital tax in our two period consumptionsavings model suppose...

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2. Capital Tax: In our two period consumption-savings model, suppose that positive interest income in period 2 is taxed at rate t. Assume that Ao -0, the individual has positive endowment in both periods, and nominal prices for the good remain the same despite the ax (a) Write down the budget constraints in each period and obtain an algebraic expression for his life-time budget constraint. (b) Suppose that at the optimal choice, the representative individual is choosing not to save in period 1. i. At his current optimal choice, is his marginal rate of substitution between current and future consumption equal to one plus the real interest rate? Explain why or why not. ii. Suppose that the tax rate on interest income is lowered. Would this change in the d 1? Explain vour tax rate encourage the representative agent to save more in perio answer carefully with aid of graphs

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