Econ303 HW8: Analyzing Household Consumption & Savings with Tax & Social Scenarios - Prof., Assignments of Macroeconomics

Download Econ303 HW8: Analyzing Household Consumption & Savings with Tax & Social Scenarios - Prof. and more Assignments Macroeconomics in PDF only on Docsity! Econ303 Homework 8 Due November 12th 1 Households live for two periods. A household has life-time utility √ c1 + 0.9 √ c2 The income of this household are as follows: y1 = 50, 000 and y2 = 20, 000. The real interest rate r = 10%. Household budget constraint is c1 + c2 1 + r = y1 + y2 1 + r 1. 1.5 points How much will this household consume in each period? How much does this household save? 2. 1.5 points Now suppose that this household cares about its future more; the subjective discount factor increases to 0.95. The increase of the subjective discount factor could due to technology advances in medicine; households could stay healthy and live longer. How much will this household consume in each period? How much does this household save? Compare with part 1, what do you find? 3. 2 points Now suppose that the subjective discount factor has’t changed. Suppose that government levies flat rate tax on capital income, with tax rate τ = 50%. Household budget constraint becomes c1 + c2 1 + (1− τ)r = y1 + y2 1 + (1− τ)r How much will this household consume in each period? How much does this household save? Compare with part 1, what do you find? How much revenue can government collect? 4. 2 points Now suppose that government levies flat rate consumption tax instead of capital income tax. The tax rate on consumption is τ c = 1%. Household budget constraint becomes (1 + τ c) · c1 + (1 + τ c) · c2 1 + r = y1 + y2 1 + r How much will this household consume in each period? How much does this household save? Compare with part 1, what do you find? How much revenue can government collect in this case? Compare the result in part 4 with the result in part 3, what do you find? 5. 1.5 points Now suppose that government does not collect consumption tax and cap- ital income tax, but decides to implement social security. Households income when young(first period) is subject to 12% social security tax. The benefits when old (sec- ond period) is household’s contribution when young plus market return. (Fully funded social security system). Household budget constraint becomes c1 + c2 1 + r = (1− 0.12) · y1 + y2 + (1 + r) · 0.12 · y1 1 + r