tailieunhanh - Ten Principles of Economics - Part 48

Ten Principles of Economics - Part 48. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 21 THE THEORY OF CONSUMER CHOICE 485 consumption when young and thus higher saving. consumption when young and thus lower saving. Figure 21-16 An Increase in the Interest Rate. In both panels an increase in the interest rate shifts the budget constraint outward. In panel a consumption when young falls and consumption when old rises. The result is an increase in saving when young. In panel b consumption in both periods rises. The result is a decrease in saving when young. The end result of course depends on both the income and substitution effects. If the substitution effect of a higher interest rate is greater than the income effect Sam saves more. If the income effect is greater than the substitution effect Sam saves less. Thus the theory of consumer choice says that an increase in the interest rate could either encourage or discourage saving. Although this ambiguous result is interesting from the standpoint of economic theory it is disappointing from the standpoint of economic policy. It turns out that an important issue in tax policy hinges in part on how saving responds to interest rates. Some economists have advocated reducing the taxation of interest and other capital income arguing that such a policy change would raise the after-tax interest rate that savers can earn and would thereby encourage people to save more. Other economists have argued that because of offsetting income and substitution effects such a tax change might not increase saving and could even reduce it. Unfortunately research has not led to a consensus about how interest rates affect saving. As a result there remains disagreement among economists about whether changes in tax policy aimed to encourage saving would in fact have the intended effect. DO THE POOR PREFER TO RECEIVE CASH OR IN-KIND TRANSFERS Paul is a pauper. Because of his low income he has a meager standard of living. The government wants to help. It can either give Paul 1 000 worth of food 486 PART SEVEN ADVANCED TOPIC a