1.Diminishing Returns to Capital and Real Wages. Explain why this statement is wrong: “Since capital is subject to diminishing returns, an increase in the supply of capital will reduce real wages.” 2. Government Spending, Taxes, and Investment. Suppose a government places a 10 percent tax on incomes and spends half the money from taxes on investment and half on public consumption goods, such as military parades. Individuals save 20 percent of their income and consume the rest. Does total investment (public and private) increase or decrease in this case?.

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Q: 2

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A:

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