Problem
The government has tried to encourage savings by allowing individuals to save a limited amount for their retirement, without facing taxes on interest. Assume individuals can put, say, $2000 a year in a retirement account (called an individual retirement account, or IRA), and that the interest would not be taxed. Draw the individual's budget constraint (between consumption today and consumption at retirement) with and without the IRA. Describe the income and substitution effects for (a) an individual who was planning to save a little; (b) an individual who was planning to save a great deal. In each case, what difference might it make if the individual has other assets, such as a savings account? Discuss the equity and efficiency consequences of changing the rules so that only amounts in excess of $2000 per year are afforded special tax treatment.
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.