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Recall that the fiscal debt can be defined as Bt = Gt + Trt -Txt + (1+i)Bt-1. Suppose the tax structure is such that tax
Recall that the fiscal debt can be defined as Bt = Gt + Trt -Txt + (1+i)Bt-1. Suppose the tax structure is such that tax receipts Tx are lump sum. Suppose that the lump sum amount falls. Assume perfectly sticky short run prices in a standard IS/LM structure. Does the primary deficit rise or fall? Does interest cost on the debt rise or fall? Explain your answer.
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