Consider a two-period model in which the goverment introduces a tax on interest earnings. This means that borrowers pay a net interest rate of r, however lenders (savers) receive a net interest ate of (1-t) r on their savings, where t is the tax rate withheld by the government and is a multiplication sign. Let r = 8 percent and t = 28 percent. Consider a consumer who is a saver. Answer parts a), b), c) and d) below. Round your numerical answer in part a) to 3 decimal places. ). The relative price of consumption today to consumption tomorrow for this saver is ). Suppose the tax rate increases. How does the saver's relative price of consumption today change? OA. Consumption today has the same price relative to consumption tomorrow. OB. Consumption today becomes relatively more expensive OC. Consumption today becomes relatively cheaper ). As a result, the substitution effect shows that OA. Consumption today increases, while consumption tomorrow decreases OB. Consumption today remains unchanged, which consumption tomorrow increases OC. Consumption today declines, while consumption tomorrow increases
Consider a two-period model in which the goverment introduces a tax on interest earnings. This means that borrowers pay a net interest rate of r, however lenders (savers) receive a net interest ate of (1-t) r on their savings, where t is the tax rate withheld by the government and is a multiplication sign. Let r = 8 percent and t = 28 percent. Consider a consumer who is a saver. Answer parts a), b), c) and d) below. Round your numerical answer in part a) to 3 decimal places. ). The relative price of consumption today to consumption tomorrow for this saver is ). Suppose the tax rate increases. How does the saver's relative price of consumption today change? OA. Consumption today has the same price relative to consumption tomorrow. OB. Consumption today becomes relatively more expensive OC. Consumption today becomes relatively cheaper ). As a result, the substitution effect shows that OA. Consumption today increases, while consumption tomorrow decreases OB. Consumption today remains unchanged, which consumption tomorrow increases OC. Consumption today declines, while consumption tomorrow increases
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![Consider a two-period model in which the goverment introduces a tax on interest earnings. This means that borrowers pay a net interest rate of r, however lenders (savers) receive a net interest
rate of (1 – t)r on their savings, where t is the tax rate withheld by the government and is a multiplication sign. Let r = 8 percent and t = 28 percent.
Consider a consumer who is a saver. Answer parts a), b), c) and d) below.
Round your numerical answer in part a) to 3 decimal places.
a). The relative price of consumption today to consumption tomorrow for this saver is
b). Suppose the tax rate increases. How does the saver's relative price of consumption today change?
A. Consumption today has the same price relative to consumption tomorrow.
B. Consumption today becomes relatively more expensive
C. Consumption today becomes relatively cheaper
c). As a result, the substitution effect shows that
A. Consumption today increases, while consumption tomorrow decreases
B. Consumption today remains unchanged, which consumption tomorrow increases
C. Consumption today declines, while consumption tomorrow increases](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F042cbff7-b985-4c2c-85a3-dac6aeb187ca%2Fdc15811e-7cf3-4f12-ba38-3e1dd73d15bb%2F5k5odxw_processed.png&w=3840&q=75)
Transcribed Image Text:Consider a two-period model in which the goverment introduces a tax on interest earnings. This means that borrowers pay a net interest rate of r, however lenders (savers) receive a net interest
rate of (1 – t)r on their savings, where t is the tax rate withheld by the government and is a multiplication sign. Let r = 8 percent and t = 28 percent.
Consider a consumer who is a saver. Answer parts a), b), c) and d) below.
Round your numerical answer in part a) to 3 decimal places.
a). The relative price of consumption today to consumption tomorrow for this saver is
b). Suppose the tax rate increases. How does the saver's relative price of consumption today change?
A. Consumption today has the same price relative to consumption tomorrow.
B. Consumption today becomes relatively more expensive
C. Consumption today becomes relatively cheaper
c). As a result, the substitution effect shows that
A. Consumption today increases, while consumption tomorrow decreases
B. Consumption today remains unchanged, which consumption tomorrow increases
C. Consumption today declines, while consumption tomorrow increases
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