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Assume that the typical household behaves according to Irving Fisher's two-period model, that consumption in both periods is a normal good and that...

Assume that the typical household behaves according to Irving Fisher’s two-period
model, that consumption in both periods is a normal good and that households are
initially savers. Explain using a diagram how a tax cut in period two affects consumption
in both periods. Assume that the average consumer does not believe that he/she or
anyone in the family will ever have to pay higher taxes in the future to offset the current
cuts.

This question was asked on Apr 19, 2010.

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