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Long-run impact of government policies

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Reference no: EM132476586

Suppose that a caretaker government reduces government purchases and increases taxes.

a) What will be the long-run impact of such government policies on private savings, public savings and national savings?

b) Use the model of loanable funds to determine what will be the impact of such policies on savings, investments and real interest rate.

c) How will the results change if the caretaker government is replaced by a socialist party that increases social benefits and reduces the income tax of low-income households? (Assume government purchases of fixed)

d) How will your answer to (c) change if savings are an incrasing function of the interest rate?

Reference no: EM132476586

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