Question: The government wishes to bring about an increase in investment
The government wishes to bring about an increase in investment expenditures, and is considering two tax policies that policymakers think could bring this about. Under the first tax policy, firms would receive a subsidy in the current period of t per unit of current output produced. Policymakers reason that firms will use this subsidy for investment. The second policy under consideration is an investment tax credit, by which 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 government's goal of increasing current investment expenditures, and carefully explain your results.
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