Problem
Using the phase diagram to analyze the impact of an anticipated change. Consider the policy described in Problem 2.10, but suppose that instead of announcing and implementing the tax at time 0, the government announces at time 0 that at some later time, time t1, investment income will begin to be taxed at rate τ.
(a) Draw the phase diagram showing the dynamics of c and k after time t1.
(b) Can c change discontinuously at time t1? Why or why not?
(c) Draw the phase diagram showing the dynamics of c and k before t1.
(d) In light of your answers to parts (a), (b), and (c), what must c do at time 0?
(e) Summarize your results by sketching the paths of c and k as functions of time.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.