Suppose you are responsible for economic policy making in your country. Your

country is experiencing an economic recession and needs a fiscal stimulus. Which

one will be more effective in boosting the economy (i.e. to increase present

consumption), a temporary cut in income taxes or a temporary cut in sales tax of

durable goods? Discuss this question in relation to Figure 18.7.

?

?[hint: Suppose a saver in a life cycle model, with a choice between present

consumption and future consumption.Discuss with substitution effect and

income effect.]

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