Question

Question 1

Suppose congress passes significant tax cuts on household income but does not reduce spending, so that the government budget deficit is larger. Use the Solow growth model of Chapter 8 to graphically illustrate the impact of the tax cut on the steady-State level of capital per worker and the steady state level of output per worker. (Hint: in answering this question, think deeply how a larger government budget deficit affect savings)

Make sure you label correctly the: a axes; the curves; initial steady state levels; terminal steady state levels; and the direction curves shift

Answer 1

Answer:

Solow growth model to graphically illustrate the impact of the tax cut on the steady-State level of capital per worker and the steady state level of output per worker is :

When there are tax cuts and no reduction in spending then it means that deficit is increasing and with increasing deficit, saving goes down

Graph:

Hence ,

by the change in technology the output per capita will increase and so the depreciation rate will also increase and also steady state capital change.