Question 2.Problems and Applications # 3 in textbook chapter 16.

The Canada and Quebec pension system levies a tax on workers and pays benefits to the elderly. Suppose that government increases both the tax and the benefits. For simplicity, assume that the government announces that the increases will last for one year only.

1. How do you suppose this change would affect the economy? (Hint:Think about the marginal propensities to consume of the young and the old.)
2. Does your answer depend on whether generations are altruistically linked?