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Question
In a two-period model, assume that there are 20 households each with an income of $35,000 in period one and an income of $45,000 in period two. The equilibrium rate of interest faced by the household is 50 percent. The government decides to offer each household a tax rebate of $1,500 in period one. As a rational economic agent you know that the government will tax the households in period two, in order to repay its borrowing. With the interest rate unaffected by the government's action, the government will impose a tax of ______per household, in period two.a. $2,600
b. $3,265
c. $1,500
d. $2,250
Answer
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