1. What are the two components of the user cost of capital? Explain why each is a cost of using a capital good. 2. Use the concepts of income effect and substitution effect to explain why the effect on desired saving of an increase in the expected real interest rate is potentially ambiguous. 3. Define the expected real after-tax interest rate. If the tax rate on interest income declines, what happens to the expected real after-tax interest rate? 4. You have just taken a job that requires you to move to a new city. In relocating, you face the decision of whether to buy or rent a house. A suitable house costs$300,000 and you have saved enough for the down payment. The (nominal) mortgage interest rate is10% per year, and you can also earn 10% per year on savings. Mortgage interest payments are tax deductible, interest earnings on savings are taxable, and you are in a 30% tax bracket. Interest is paid or received, and taxes are paid, on the last day of the year. The expected inflation rate is 5% per year. The cost of maintaining the house (replacing worn-out roofing, painting, and so on) is 6% of the value of the house. Assume that these expenses also are paid entirely on the last day of the year. If the maintenance is done, the house retains its full real value. There are no other relevant costs or expenses. a. What is the expected real after-tax interest rate on the home mortgage? b. What is the user cost of the house? c. If all you care about is minimizing your living expenses, at what (annual) rent level would you be just indifferent between buying a house and renting a house of comparable quality? Rent is also paid on the last day of the year. 5. Use a saving-investment diagram to explain what happens to saving, investment, and the real interest rate in each of the following scenarios in a closed economy. a. In an agricultural economy, great weather this year promises a bumper crop next year, leading citizens to expect higher income next year. b. Government regulations going into effect next year will reduce the marginal product of capital. c. The government increases lump-sum taxes on citizens