The German government wants to decide about a stimulus package to combat the economic consequences of the Corona pandemic. The government asks you to evaluate various policy options and give a recommendation that keeps the government deficit in line with the Maastricht criteria. Assume that the economy is fully described by the following equations (with C= Consumption, Y= Income, T= Tax). C = 14 + 0.8 (Y-T) T = 0.33Y Investments are 100 and government expenditures are 350. Option 1: A reduction of value added tax, reducing the tax rate from 33% to 30%. Option 2: Like option 1 a reduction of the tax rate to 30%, but additionally a subsidy for buying cars that would increase government spending by 20. Calculate equilibrium income and budget surplus for the current state of the economy and for both options. Are these options in line with the Maastricht deficit criteria
The German government wants to decide about a stimulus package to combat the economic
consequences of the Corona pandemic.
The government asks you to evaluate various policy options and give a recommendation that
keeps the government deficit in line with the Maastricht criteria. Assume that the economy is
fully described by the following equations (with C= Consumption, Y= Income, T= Tax).
C = 14 + 0.8 (Y-T)
T = 0.33Y
Investments are 100 and government expenditures are 350.
Option 1: A reduction of value added tax, reducing the tax rate from 33% to 30%.
Option 2: Like option 1 a reduction of the tax rate to 30%, but additionally a subsidy for
buying cars that would increase government spending by 20.
Calculate equilibrium income and budget surplus for the current state of the economy and for
both options. Are these options in line with the Maastricht deficit criteria
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