Suppose that the government wants to increase the investment, and is considering two tax policies to accomplish this goal. Under the first tax policy, in the current period firms would receive a subsidy of t per unit of output produced. Under the second policy, firms would receive a subsidy of s per unit of investment in the current period. Determine which tax policy would be more effective in accomplishing the governmentâs goal of increasing current investment expenditures. Also, analyze the effects of these policies on output produced, employment, consumption, real interest rate and wage.
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