Why does the way government achieves deficit reduction make a difference for economic growth?
a. Assuming that the government raises taxes on interest income, what is the total impact on national savings, taking into account both deficit reduction and changes in private savings? What is the impact on investment?
b. Assuming that the government raises taxes on wage income, what is the impact on GDP in the short run? What is the impact on the deficit and on investment?
c. Assume that the government reduces expenditures on investments in technology and education, which yield a return of 15 percent, whereas the marginal return on private investment is 7 percent. What is the impact on growth?