Other
ECO3020F tutorial 8
- Course
- ECO3020F (ECO3020)
- Institution
- University Of Cape Town (UCT)
Tut questions and memo
[Show more]
Seller
Follow
Content preview
1 Atctax cut in period
AGCINI
2
in period
future tax liability
wealth A
ÉE
E Ez MC
off
f
tax cnn.owri.am
É credit constrained
B f
59 Qingvsiending
entire tax cutspent
on c
current consumption
notconstrained not saving
IEfaama
Assuming the consumer receives a cut in taxes in current period:
benefits constrained
• Period 1 taxes change by Dtwith a corresponding change of Dt Itv1 in future taxes
• The e ect of change in current b future taxes is to shift endowment from E1 point to Ez
• Consumer now chooses E2 as optimal consumption bumble on IC I2
Assuming the government pays r1 on debt
• The consumer’s future tax liability, shown by the tax cut, is
Atc tri
As they choose a point of endowment before and after the tax cut, period 1 consumption increases
by the amount of the tax cut ( At) . Current consumption increases as the government is setting a
low interest loan through the tax cut. If borrowing was possible at r1, G would be the chosen point.
When the consumer receives a tax cut , they experience a current tax cut and a future increase in
taxes. This shifts budget constraint from AE1B to AE2F. The consumers optimal bundle shifts from
E1 to E2 and the entire tax cut is had by the consumer. Current consumption increases, while future
consumption decreases and as they are credit constrained they save zero (the entire tax cut is spent
on Current consumption.)
Decrease in creditworthy borrowers
LEDC borrowing
defaultpremium
r
higher
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller hslisa001. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R79,33. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
67474 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy summaries for 14 years now