Q. What are your predictions for the economy of Thrifty peg based on the following policy scenario:
1. Suppose the government decides to increase taxes. What happens to total output, disposable income, consumption, public saving, private saving, and national saving?
(1) Assume Ricardian Equivalence does not hold,
(2) Assume households consume a constant fraction (MPC) of current income in current period where MPC is defined as the marginal propensity to consume out of income and is between 0 and 1.
2. Output, total hours worked, and average labor productivity all are procyclical. Which variable, output or total hours worked, increases by a larger percentage in expansions falls by a larger percentage in recessions?
Average labor productivity = output ÷total hours worked, so that the percentage change in average labor productivity equals the percentage change in output minus the percentage change in total hours worked.