The government plans to increase its government purchases by 2 million dollars every year, which will be financed by an increase in lump-sum taxes of 2 million dollars every year. Now the government has to decide whether such fiscal policy is permanent or temporary. As an economic adviser, you are asked to evaluate the following effects of these two options.

a. Examine the effects on real wage and employment in the labor market.

b. According to the permanent income theory discussed in the previous chapter: Consumption, Saving and Investment, a temporary rise in income represents a rise in current income with future income held constant whereas a permanent increase in income raises both current income and future income. A permanent one-unit increase in income will raise current and future consumption more than a temporary one-unit increase in income will.
Following this line of reasoning, what will be the effect on consumption?

c. Continuing from your answer to (a) and (b), discuss the effects on output and real interest rate using the IS-LM model. Assume that the change in consumption is less than the change in tax (2 million) every year.