Felice lives and works for two periods. In the first period, she earns 520 coconuts and in the second period, she earns 570 coconuts. In each period, she pays 20 coconuts in taxes. a. Suppose that Felice can save or borrow from a bank at the same interest rate of 10%. Suppose also that she likes to consume today 240 coconuts. Draw her budget constraint including both intercepts, her endowment point including its coordinates, and use an indifference curve to show her optimal consumption point and its coordinates. b. Suppose that the government cuts taxes by 10 coconuts. What will the government have to do to taxes in the future period to meet its lifetime budget constraint? c. What is the effect of the government’s action on Felice’s lifetime wealth, budget constraint and endowment point? Show and explain. d. What is the effect of the tax cut on her current consumption and welfare? Does the Ricardian equivalence hold? Explain! e. Now suppose that the economy enters a recession, and some people begin to default on their loans. Banks estimate that about 4% of lenders will default. Assuming that the deposit rate stays at 10%, what lending rate will they charge to stay in business? Round to the closest first decimal. f. Suppose the recession happened before the tax cut. Redraw Felice’s budget constraint and her endowment point during the recession. g. Show graphically what will happen to Felice’s budget constraint. h. Show on the graph how the recession affects her current consumption and explain why as well as how it affects her welfare. i. Now suppose that the government gave the same tax cut as in part (b). Show on the graph how the tax cut affects her current consumption and explain why as well as how it affects her welfare. j. Does the Ricardian equivalence hold? Explain!
Felice lives and works for two periods. In the first period, she earns 520 coconuts and in the second period, she earns 570 coconuts. In each period, she pays 20 coconuts in taxes.
a. Suppose that Felice can save or borrow from a bank at the same interest rate of 10%. Suppose also that she likes to consume today 240 coconuts. Draw her
budget constraint including both intercepts, her endowment point including its coordinates, and use an indifference curve to show her optimal consumption point and its coordinates.
b. Suppose that the government cuts taxes by 10 coconuts. What will the government have to do to taxes in the future period to meet its lifetime budget constraint?
c. What is the effect of the government’s action on Felice’s lifetime wealth, budget constraint and endowment point? Show and explain.
d. What is the effect of the tax cut on her current consumption and welfare? Does the Ricardian equivalence hold? Explain!
e. Now suppose that the economy enters a recession, and some people begin to default on their loans. Banks estimate that about 4% of lenders will default. Assuming that the deposit rate stays at 10%, what lending rate will they charge to stay in business? Round to the closest first decimal.
f. Suppose the recession happened before the tax cut. Redraw Felice’s budget constraint and her endowment point during the recession.
g. Show graphically what will happen to Felice’s budget constraint.
h. Show on the graph how the recession affects her current consumption and explain why as well as how it affects her welfare.
i. Now suppose that the government gave the same tax cut as in part (b). Show on the graph how the tax cut affects her current consumption and explain why as well as how it affects her welfare.
j. Does the Ricardian equivalence hold? Explain!
((I have answers to Part a-d), I need the answers of e-J now)
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