Question

In the simplified model with proportional taxation introduced at the end of chapter 5, there can be two equilibria, one with a high tax rate and one with a low tax rate. Now, suppose that government spending increases. Determine the effects of an increase in G on consumption, leisure, labor supply, real output, and the tax rate in a high-tax-rate equilibrium and in a low-tax-rate equilibrium. How do your results differ? Explain why.

Answer 1

answer is given below

Step-by-step explanation:

Equilibria with high tax rate.

• In the high balance tax system, taxes are already high. Make government spending and revenue sources mandatory. and Tax rates decrease.

• The income effect leads to an increase in both consumption and leisure, but when the alternative effect is taken into account, higher costs lead to greater employment and greater consumption but leave the party on leave.
• Tax base witnesses grow. Output increases but relaxation decreases.

Equilibria with low tax rate:

• An increase in government spending leads to an increase in tax rates to increase income sources.
• The increase in taxes leads to a decline in consumption and production.
• Therefore, the amount of time spent at rest will increase.