Suppose that National Assembly passes a new budget that increases spending on public education by $300 billion (or, approximately $1,000 per person). Assume that this spending is completely wasteful in the sense that it produces no discernable improvement in the public education system (a pretty fair assumption given the empirical evidence). a) Explain the impact of this policy on employment and interest rates assuming that the spending is finances by an immediate lump sum tax of $1000 per person. Does it matter if the spending is perceived as permanent? b) How would your answer to (a) change if the spending was financed by a proportional increase in all marginal income tax rates. c) How would your answer to (a) change if the spending was financed by an increase in the capital gains tax (think of the capital gains tax as a tax on savings)?

Suppose that National Assembly passes a new budget that increases spending on public education by $300 billion (or, approximately $1,000 per person). Assume that this spending is completely wasteful in the sense that it produces no discernable improvement in the public education system (a pretty fair assumption given the empirical evidence). a) Explain the impact of this policy on employment and interest rates assuming that the spending is finances by an immediate lump sum tax of $1000 per person. Does it matter if the spending is perceived as permanent? b) How would your answer to (a) change if the spending was financed by a proportional increase in all marginal income tax rates. c) How would your answer to (a) change if the spending was financed by an increase in the capital gains tax (think of the capital gains tax as a tax on savings)?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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