Answer the following questions about taxes on investment income:

(a) Suppose the government hikes all taxes on investment income. If this new tax policy results in an increase in aggregate savings, which effect dominates? The income effect or the substitution effect? Explain. (6 points)

(b) Suppose the government raises the annual maximum contribution limits for Individual Retirement Accounts (IRAs) from $7,000 to a new maximum of $10,000. According to the intertemporal choice model, which group would be more likely to respond to the new policy by increasing their rate of saving? Low-income or high-income individuals? Explain. (6 points)