Exercise 1:

The government of a country needs to increase production "Y" from Y=3000 to Y=5000, for which the Ministry of Finance proposes two possible fiscal policy alternatives:

1. Increase the salaries of teachers in municipal and subsidized schools, which implies an increase in public spending (G).

2. Reduce indirect taxes (To) on books, magazines and newspapers.

Suppose:

c=0.8

t=0.2

I = io

C = Co +cYd

1. Analyze and indicate, which of the two policy proposals is the most convenient for the state to apply? explain.

2. Graph to justify your answer.