2. Think about a small open economy. Its government announces that they will have a tax...

2. Think about a small open economy. Its government announces that they will have a tax cut of $200 million this year, and there will be a tax increase of $210 million next year, when the interest rate is 5%. a. If Ricardian equivalence holds, what are the effects of this change (tax cut and subsequent tax increase) on i. the world real interest rate, (0.5) ii. national saving, investment, and (0.5) iii. the current account balance in equilibrium? (0.5) b. If Ricardian equivalence does not hold, what are the effects of this change (tax cut and subsequent tax increase) on i. the world real interest rate, (0.5) ii. national saving, investment, and (0.5) iii. the current account balance in equilibrium? (0.5) Explain your answers. (2)

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Rahul Sunny answered 1 year ago

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