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Q. [52 points] Let:s investigate the e'ects of a decline in the proportional labour tax rate___ denoted by 75 using the oneperiod closed econom}: model.

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Q. [52 points] Let:s investigate the e'ects of a decline in the proportional labour tax rate___ denoted by 75 using the oneperiod closed econom}: model. In this model? there are no lumpsum taxes. Instead; the government uses proportional labour tax rates on the consumer's income and it has decided to reduce it. The consumers preferences are given by \"I... U [cit] = c: E subject to the following budget constraint c: [l 'r]u'-I:h Il : Where i denotes prots and -.- is the tax rate. The consumer has h. units of time to split between labour and leisure} h = 3 + f. The consumer's disposal income is denoted by [:1 T}w[h 3'1. The governments budget constraint is G' = -.-w_\\_ Where G represents government purchases and nul represents the total tar; revenue and depends on the tax rate if]; wage rate 1121 and labour {IA'1. The aggregate production is given by Y : 23' Where 2 represents Total Factor Productivity and X is labour

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