Question 2 1. Discuss the effects on future generations resulting from an increase in G in the present (financed by borrowing in a closed economy), following the same assumptions we had in lecture 12 (G is only government consumption and provides only costs due to higher taxes (no benefits); Y in the present remains unchanged and there is a complete crowding out effect. Assume that individuals do not anticipate the higher taxes to be paid in the future. The effect on future generation should be measured in terms of their after-tax income.

Excerpt: Fiscal policy should likewise support the transformation of economies to increase productivity and economic growth. In several countries, reaching this goal calls for increasing high-quality investments in physical capital and education and better targeting fiscal transfers toward policies that support the retraining and reallocation of workers across firms and sectors IMF!!!, Fiscal Monitor, October 2021

2. Now, discuss the effects on future generations resulting from an increase in government purchases that follow the assumptions that are implicit from the paragraph above (disregard the part on transfers). Assume that this policy has the same costs (taxes will be paid in the future) as your answer in part 1. 2 Suggest one specific example of government purchases of goods and services that increases total factor productivity in the present and future K. You may also include human capital in your Cobb-Douglas production function. Under these circumstances, is it possible that an increase in G crowds in, rather than crowds out, present private absorption? Explain and discuss your answer using the Y = C + I + G equation and illustrate your answer on the S-I graph.