Question
Suppose a government decides to reduce spending and (lump-sum) income taxes BY THE SAME AMOUNT. Using the long-run model of the economy, graphically illustrate the
Suppose a government decides to reduce spending and (lump-sum) income taxes BY THE SAME AMOUNT. Using the long-run model of the economy, graphically illustrate the impact of the equal reductions in spending and taxes. Be sure to label the axes, the curves, the initial equilibrium values, the direction that the curves shift, and the terminal equilibrium values.
State in words what happens to the real interest rate, national saving, investment, consumption, and output.
Note: I've seen multiple answers online where the savings supply curve is shifted right, is that correct? Doesn't reducing taxes decrease savings? I thought if it's the same amount then the curve wouldn't move from equilibrium.
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