Part C: Problem-Solving question (60 marks) Question 1: {15 marks} As an economic advisor to the Treasurer of country A, you are required to provide some assessment of the likely impact of an increase in the tax rate from its current level of 38% percent to a new proposed level of 45 percent. The first element of your analysis is the calibration of a theoretical model with the following elements: Production Function: Y = AKaNl\"Gl Budget constraint: G = TY Physical capital accumulation: AK 2 5(1 I)Y 6K Y is the level of total GDP, K is the stock of physical capital, N is the stock of labour, G is government expenditure, A denotes the level of technological efficiency which is assumed to be constant. Your team of economic analysists provides the following information: o The rate of population growth in this country is zero and expected to remain at zero for the long-term The saving rate (5) is 30% The Labor stock is 300 units The rate of capital depreciation (6) is 5% The current level of technological efficiency is measured as 0.15 The production function is characterised by a = 0.4 Using this information, you prepare your analysis of the relationship between tax rate and growth rate of GDP per-capita: a) (6 marks) Present and briefly comment a diagram representing the relationship between tax rate (displayed on the horizontal axis) and growth rate (displayed on the vertical axis), using the theoretical model and the information provided by your team of economic analysts. b) (3 marks) Based on the results from part a, predict the rate of growth of the economy if the tax rate is increased to 45%. Briefly explain the economics underlying your result. c) (3 marks) Based on your analysis, and assuming that the goal ofthe Treasurer is to maximise growth, what is your advice: should the tax rate be increased or not? A member of your staff finds a very recent paper that present empirical estimates of the relationship between tax rate and growth rate based on a sample of countries similar to country A. The main result of the empirical estimates is reported in the following table Variable in the regression equation Estimated coefficient *** means that the p-value of the estimated coefficient is smallerthan 0.01 Constant 8032*\" Tax rate 1.012*** Tax rate squared -14.521*** d) (3 marks) Do the empirical findings of this paper make you change your advice as to whether the tax rate should be increased or not? Briefly explain why