Find the implications plausible

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Reference no: EM131139180

Consider the baseline AK model of Section 11.1 and suppose that two otherwise-identical countries have different taxes on the rate of return on capital. Consider the following calibration of the model: A = 0.15, δ = 0.05, ρ = 0.02, and θ = 3. Suppose that the first country has a capital income tax rate of τ = 0.2, while the second country has a tax rate of τ' = 0.4. Suppose that the two countries start with the same level of income in 1900 and experience no change in technology or policies for the next 100 years. What will be the relative income gap between the two countries in 2000? Discuss this result and explain why you do (or do not) find the implications plausible.

Reference no: EM131139180

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