Q1: What happens to the level of savings as the tax rate increases?
Q2: What happens to the level of total taxes as the tax rate increases?
here's what I have.
A1: let savings be defined as the difference between income and consumption; S = y - C (this is how it was defined in-class). Substituting the consumption function (C = a + b*yd) in for C, and the disposable income function (y - y*t, where t is the tax rate) in for yd, I get, simplified, S = y - a - b*y + b*t*y, or S = -a + y(1 - b + b*t). Since b is some value between 0 and 1 (percent of a dollar used for consumption), the sum (1 - b + b*t), and accordingly the product y(1 - b + b*t) increases as t increases, which should lead to an increase in savings.
A2: let total taxes be defined as the product of income and the tax rate; T = y*t. As the tax rate (little t) increases, y*t increases.
My problem is that neither of these answers (apparently) are correct. The answer to the first is listed as a decrease in savings, while the answer to the second is listed as an indeterminate (+ or -) change in the level of total taxes.
I hate to be the guy to ask homework questions here, but it's been bugging me all day and the teacher in question won't answer any questions regarding homework/quizzes handed back until a couple days after (to give you time to think about them).
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