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a) b) Suppose that an individual lives for 2 periods, earning $50,000 in period 1. Whatever she saves earns an interest rate, r, of 5%.
a) b) Suppose that an individual lives for 2 periods, earning $50,000 in period 1. Whatever she saves earns an interest rate, r, of 5%. Draw the individual's intertemporal budget constraint. Be sure to clearly label the axes, endpoints, and slope of the budget line. Now suppose the government imposes a tax on interest at a tax rate, t, of 20%. Draw the new intertemporal budget constraint. Again, be sure to clearly label the axes, endpoints, and slope of the budget line. Suppose that the government discovers that after imposing this tax, savings increase. Which effect dominates, the income effect or the substitution effect? Explain (12 sentences)
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