Economics E362, Replacement Assignment Exam 2, Spring 2017

Economics E362, Replacement Assignment Exam 2, Spring 2017

Subject: Economics / Accounting
Question
1. 1. Define the income and substitution effects as it relates to the amount that people will save.

The substitution effect is:

If taxes increase on the returns from savings, then the substitution effect says that people would save (circle one: More, Less, the same) as before the tax change.

The income effect is:

2. Define the income and substitution effects as it relates to the number of hours that people will work.

The substitution effect is:

The income effect is:

If taxes decrease on wages, then the income effect says that people would decide to work (circle one: more, less, the same) number of hours.

5. Graph the effects on the savings inter-temporal budget constraint for each of the below situations. You are required to use the graphical representation of the lifecycle modelâs inter-temporal budget constraint (only draw the budget constraints) we discussed in class.

A. Assume deductibility of interest rates on borrowed money and taxing interest earnings. For full credit you must fully label your graph to include intercepts, the value of the slope (use t for the tax rate) over all areas of the inter-temporal budget constraint, and the endowment point.

B. Assume a progressive tax system with 2 tax brackets are applicable for this individual. Assume non-deductibility of interest rates on borrowed money and the taxing of interest earnings. For full credit you must fully label your graph to include intercepts, the value of the slope (use t1and t2 for the two tax rates) over all areas of the inter-temporal budget constraint, and the endowment point.