Question

Suppose $400 worth of government bonds are sold on the market to raise public funds. $200 of this is diverted from current private consumption spending and $200 is from current private investment spending. The tax rate on the returns to private investment is 30%. a. Calculate: i. The total cost to the economy of raising the $400 of public funds [2 marks] ii. The deadweight loss [2 marks] iii. The marginal cost per dollar of public funds raised [2 marks]

For the first part, the solution said current private consumption + current private investment * ( 1/ 1-taxrate) = $442.86

I do not still get how you got 242.86 for current private investment * ( 1/ 1-taxrate) cuz I got 200*(1/1-0.3)=285.71

Answer 1

The answer for above problem is explained below.