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Please help! Consider a closed economy that is well characterized by a standard IS/LM structure with perfectly sticky prices, but with the following modications: To

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Consider a closed economy that is well characterized by a standard IS/LM structure with perfectly sticky prices, but with the following modications: To = to + t1| ; (Taxes is a function lump sum tax and tax on investment) I = i0 -i1r -i2t1; (Investment is a function of interest rate and tax rate) C: a +b(Y to) ,' (consumption is a function of after-tax income where the tax is lump sum) Suppose the government wants to increase taxes on investment. The fiscal authorities are concerned that this will adversely impact economic activity, Y. To counteract this effect, the fiscal authorities plan to alter lump sum taxes. By how much do they do so? [notez assume the economy is stuck in a liquidity trap so r is fixed at some constant value.]

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