In the two-period model, suppose a household's income in the first period is $40,000, income in the second period is $50,000, and the real interest rate is 25 percent.The government proposes to give the household a tax rebate of $5,000 in the first period, but will tax the household an additional $5,000 × 1.25 = $6,250 in the second period.The household is _____under the government's tax rebate plan compared with before.
A)better off
B)worse off
C)equally well off
D)possibly better off and possibly worse off

Question

Quizplus · Accepted Answer

The household is equally well off because the present value of the tax rebate in the first period is exactly offset by the present value of the higher tax in the second period, given the real interest rate.

In the Two-Period Model, Suppose a Household's Income in the First