7. The Tax Cuts and Jobs Act of 2017 reduced personal income tax rates, reducing the average marginal tax rate. This will have impacts on the bond markets since municipal bonds pay interest that is not taxable while private sector bond interest is taxable. With this change, explain the effects on the bond markets by doing the following:

a. Using a two-sector model of the market for bonds (private bonds and municipal bonds), demonstrate the effects of a reduction in the income tax rate.

b. Explain what implications you would expect in the private and public sector bond markets.