Consider the behaviour of hypothetical individual

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Reference no: EM13886960

a) Let's use the model of inter temporal consumption choice to consider the behaviour of a hypothetical individual. This person is not liquidity constrained and is endowed with an exogenous amount of income in each of the current and the future periods. Assume the person must pay an income tax; that is assume he must pay fraction t of his income in the form of tax.es. Thus if he has of Y dollars then his tax bill is tY dollars and his after-tax income is (1-t)Y dollars. Use the model as an aid to showing that if it is announced the income tax rate imposed on income will increase at some point in the future, this will influence current consumption expenditures. As always, your diagram should be large, neatly drawn, well-labelled and fully explained.

b) On the basis of your answer to part (a), speculate on what this suggests for how and when policy-makers make announcements of policy changes.

c) Suppose you win $100,000. What does the permanent income hypothesis suggest will happen to your consumption spending? Explain.

Reference no: EM13886960

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