Suppose the government is considering a tax policy that will reduce taxes by $100. In the economy, household consume 80% of each additional dollar earned. Assume that the tax cut has no effect on GDP (Y)
(a) How will this tax affect consumption?
(b) Calculate the change in private savings.
(c) Calculate the change in government savings and national savings
(d) What will happen to the current account as a result of this policy?
(e) How would your previous answers change if we assume Ricardian equivalence?