Question
4. (30 points) Use the small open economy with production and investment. Suppose that the current account deficit is too high. One group of economic
4. (30 points) Use the small open economy with production and investment. Suppose that the current account deficit is too high. One group of economic advisers to the government argues that one way to reduce the current account deficit is to increase current consumer taxes (T) and decrease future consumer taxes (T"). A second group of economic advisers argues that a second way to reduce the current account deficit is to increase future consumer taxes (T"), but leave the current consumer taxes (T) unchanged. A third group of economic advisers proposes to increase future corporate taxes (I'). Using a separate graph for each advice, which advice should the government take if its key goal is to reduce the current account deficit? Briefly explain.
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