la2jgn-exam2

la2jgn-exam2 - Department of Economics University of...

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Department of Economics University of California, Davis ECONOMICS 131 Spring 2008 L. Jay Helms Final Examination Please answer all five (5) questions. 100 points are possible. 1. Two Period Consumption Model With Taxation (20 points total) Consider a consumer who earns an income of I o in the present period and I 1 in the future period. a. (5) Assume that there are no taxes on earned income or on interest income. Using a diagram with present consumption (C o ) on the horizontal axis and future consumption (C 1 ) on the vertical axis, illustrate the endowment point and explain what this point represents. Then add a budget line to your diagram given that the interest rate paid to savers (r) is the same as the interest rate charged to borrowers. Label the slope of this budget line and explain how you know what the slope is. b. (5) On the same diagram, use a dashed line to show how the budget line from part (a) will be altered if interest income from saving is taxed at rate t and interest paid on borrowing is deductible, but earned income is not subject to taxation. Label the slope of this budget line and briefly explain how you know what the slope is for both borrowers and savers. c.
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This note was uploaded on 10/15/2009 for the course ECON 131 taught by Professor Staff during the Spring '08 term at UC Davis.

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la2jgn-exam2 - Department of Economics University of...

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