C2. Income redistribution via taxation. (60 marks) In a closed economy, the rich part of working population pays higher (marginal) tax c* than the working poor to. The third cohort, pensioners, has their own marginal propensity to consume cold and rely on government's benefits. The government is committed to a balance budget and adjusts its level of spending to its net tax revenues. The populist government reduces the lower rate of tax to and increases the level of pensions. (a) [10 marks] Justify the behavioural assumptions of the analytical framework to be applied (b) [10 marks] Formulate the setup of the model (c) [10 marks] Find the multiplier of the economy [5 marks] Calculate the effect of a decrease in the lower tax rate on the marginal propensity to spend in the economy (e) [5 marks] Calculate the effect of an increase in pensions on the marginal propensity to spend in the economy (1) [20 marks] Provide intuitive explanation for macroeconomic effects of the two redistributive polices