Information for Questions 36-37 Consider the two period model of tax smoothing discussed in the handout of Fiscal Policy. Suppose the real interest rate r is constant, the level of government debt outstanding at time 0 is zero and that the fiscal authority's discount rate r is equal to p. It was shown there that the optimal levels of the tax rates (t, and tz) are equal to the ratio of the present discounted value of government spending to the present discounted value of output over the two periods. Grz ti=tz = Hr Git X + tz HY Assume that there is a war during period 1 while there is peace (i.e., no war) in period 2 so that government expenditure G is expected to be high in period 1 and low in period 2. The level of output Y, on the other hand, is expected to be constant during the two periods. be cause distortion change What would be the optimal path of tax revenues and government decit? Explain your answer in at tay most five sentences. Assume that the path of government spending is permanently higher (i.e. higher in both periods 1 and 2). What would be the impact of this change on the optimal tax rates? Explain your answer in at most three sentences. tt Information for Questions 36-37 Consider the two period model of tax smoothing discussed in the handout of Fiscal Policy. Suppose the real interest rate r is constant, the level of government debt outstanding at time 0 is zero and that the fiscal authority's discount rate r is equal to p. It was shown there that the optimal levels of the tax rates (t, and tz) are equal to the ratio of the present discounted value of government spending to the present discounted value of output over the two periods. Grz ti=tz = Hr Git X + tz HY Assume that there is a war during period 1 while there is peace (i.e., no war) in period 2 so that government expenditure G is expected to be high in period 1 and low in period 2. The level of output Y, on the other hand, is expected to be constant during the two periods. be cause distortion change What would be the optimal path of tax revenues and government decit? Explain your answer in at tay most five sentences. Assume that the path of government spending is permanently higher (i.e. higher in both periods 1 and 2). What would be the impact of this change on the optimal tax rates? Explain your answer in at most three sentences. tt