Consider a two-period economy and suppose that there is an increase in tax in Period 1, while the tax in Period 2 remains the same. Assume a standard utility function.
Part a How does the increase in tax in Period 1 affect Period 1 and 2 consumption?
Part b How does the increase in tax changes savings?
Part c Based on Part a and b, explain why the change in Period 1 consumption is less than the increase in tax (in terms of magnitude).
