The Government of Toan recently announced the approval of a major tax and spending overhaul that aims to (1) reduce the burden on its government by requiring 85% of its population to live in one of three specially designated cities, (2) completely eliminate any and all taxes on corporations for five years, (3) offer a substantial reduction to 0.5% tax rate on capital gains by investors (prior rate was 35%), and (4) elimination of government spending programs such as social security, health care, and disability support.

The country is isolated from other countries, both geo-politically and geographically. With a government budget of $500 million annually, a deficit of $8 trillion, the country of Toan is experiencing devastating inabilities to provide even the basics of services. Infrastructure is crumbling, food and water supply chain is not moving, hospitals are running out of essential medical supplies. No foreign governments are willing to loan or invest in Toan for the foreseeable future. However, Toan’s upper north region is believed to hold trillions of tons of oil, yet the country has not had the investment backing to pursue exploration and certainly does not have the infrastructure.

Toan, a country of 27 million residents (72% is between the ages of 60 and 90 and 28% are under the age of 59). Most of the working age population has a Masters degree or Ph.D. or other specialized education. The law also eliminates the retirement age in its entirety—meaning no one will have the right to retire and no one will receive a pension from the government.

Some think that this major tax overhaul has a lot to do with the recent microbial outbreak of a never-before seen virus where nearly 20% of the 1.5 million population located in the country-side have died. Is the government simply moving forward with this legislation to take the property of the deceased, exclaim a key opponent to the new law.

While the country hopes for widespread economic freedoms available to all residents, some are not convinced. However, supporters boasts “this is good law” because it moves people out of the country and into cities where we can provide more effective and efficient services. Of course, the Constitution for Toan might be impacted negatively, but according to the supporters of the law, this is the only path forward. A key politician recently stated that the government does not plan on providing due process or offering payment for the land that the citizens will forfeit to the government.

Part of the legislation provides for infrastructure improvements and new housing within 10 miles of the city centers. Corporations are said to benefit the most because their research and development expenses will no longer be taxed. Ideally, corporations will increase wages, hire more people, increase productivity, and contribute to the growing deficit of Toan. Further, because many corporations are planning to build on-site housing, the legislation will incentivize workers by offering free or reduced rate housing. Finally, the legislation requires corporations to demonstrate an increase in wages of 40% for every worker, regardless of skill or educational background. Corporations who do not increase wages will be penalized and may face jail time.

Instructions:

In a format of your choice, please provide your insights on the facts above (do not recite the facts entirely) from the perspective of a Law and Economics Consultant. Please also incorporate the following questions and include citations to references, where possible.

Has the country of Toan violated the Rule of Law?

What, if any, type of economic theory would closely match the fact pattern above?

What is meant by the term trickle-down economy?

Does the trickle-down theory work in the above situation, please explain.

Have there been successful trickle-down economies anywhere in the world, please define “successful”?

In an economy where consumer confidence is low, political distrust is high, wages are stagnant, and inflation is looming on the horizon, what is the best economic theory to put into action?

If wages go up (as stated in the fact pattern) will this solve the dilemma of the deficit of Toan? What else is needed?

Is the law that punishes corporations for not raising wages a constitutional law in a capitalist society? (assume that for this question the Country of Toan is a democracy)

Please argue for and against the new law (be sure to provide solid arguments of the “pros” and “cons” of the law.

What happens if the tax overhaul actually stabilizes the government and produces a break-even budget and minimal deficit? Should it be continued?

Is having a low unemployment rate a good or bad thing?

Use the aggregate demand and supply to show the effects of an increase in consumer spending in the short-run and in the long-run. Explain the reason for each shift

Consider a government that wants to raise investment spending in the economy. Perhaps the government is concerned about future economic growth and so wants to promote investment in order to raise growth. However, the government also does not want to increase inflation. Inflation could be caused by excessively high output growth pushing up prices. Therefore, the government does not want output to increase more than normal. Use the following questions to think about how the government could raise investment without raising output.

a) What would raise investment: higher or lower interest rate

b) Given your answer to (a), what should the Federal Reserve do to the money supply

c) What impact does the Fed’s action in (b) have on output?

d) Explain how a fiscal policy could offset the change to output in (c) without offsetting the change in interest rates in (b).

A report says that consumer spending increased by $447 in 2019

If the marginal propensity to consume is 0.35, by how much will real GDP change in response? (Answer is 687.7, how did they get that?)

If there are no more changes to consumption other than that in part 1 above, and unplanned inventory investment I(unplanned) lowered by $108, what is the change in real GDP? (Answer is 521.5, how did they get that?)

Real GDP at the end of 2018 was 1.8 x 10^ 4. If GDP were to increase or decrease by the amount in part 2, what would be the percentage change in real GDP? (Answer is 2.897, how did they get that?)

1. A student was wondering whether spending a great deal of time on a test is worthwhile, so he obtains results from a sample of 10 previous students and conduct a linear regression analysis. The results appear below.

1. Is there a significant linear association between time spent on the test and the grade? How do you know?

2. What percentage of variation in grade is explained by its relationship with time spent on the test?

3. If a student turned in her test after 100 minutes, predict her score.

A freshman who didn't take the course yet asks about the results from part a: “So, explain this to him / her. Does this mean that if a student wait and turn in the test at the last minute, he / she is  going to get a good grade?” Respond as a competent biostatistician, based on your results and your understanding of the conceptual basis of the analysis.

If there is a reduction in government spending in the Keynesian sticky wage model, show what difference it makes if the reduction is temporary or permanent. What do you conclude about how fiscal policy should be used as a stabilization device?

Suppose the president was given the authority to increase or decrease federal spending by as much as $100 billion in order to stabilize economic activity. Do you think this would tend to make the economy more or less stable?

Is the relationship between changes in spending and changes in real GDP in the multiplier effect a direct (positive) relationship, or is it an inverse (negative) relationship? How does the size of the multiplier relate to the size of the MPC? The MPS? What is the logic of the multiplier-MPC relationship? How does it relate to the economy today?

If you were the President of the United States and had to choose between spending on improvements in infrastructure (bridges, roads, trains, etc.), providing health care guarantees to families, or enhancing our military strength, which would you choose? Explain why in as much detail as possible.

Referring to the 1980s period, discuss an example of a change in autonomous spending. What is a government policy implemented during that time and a multiplier effect it had on the economy.