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2. Consider a two-period consumption-saving model. Suppose that households should pay taxes (a proportional tax denoted by t) when they have interest income (rs). The
2. Consider a two-period consumption-saving model. Suppose that households should pay taxes (a proportional tax denoted by t) when they have interest income (rs). The amount of taxes will be trs where r is the real interest rate, and S is savings. Assume that households have endowment in Period 1 and y2 in Period 2. y a. Write down the budget constraint in Period 1, denoted by (1). b. Write down the budget constraint in Period 2, denoted by (2). C. Write down the intertemporal budget constraint by using (1) and (2). Suppose that a household's utility, U = u(c) + u(c2). d. Find the optimality condition or the Euler equation. Interpret it. Suppose that the government increases the tax rate to t', i.e., t'>t, and that a household is a saver. e. By using a graph, discuss the effects of this policy on C, C and S. You should consider the income and substitution effects
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