$5.(20$ points$)$ Use the small open economy model studied in class. Suppose that the

current account de$$cit is too high. Consider also the case that the world interest rate

is equal to the country$$s initial interest rate.

$($a$)$ One group of economic advisers to the government argues that one way to reduce

the current account de$$cit is to increase current consumer lump$-$sum taxes $($T $)$

and decrease future consumer lump$-$sum taxes $($T $0),$ such that the present value

of tax revenue remains unchanged.

$($b$)$ A second group of economic advisers argues that a second way to reduce the

current account de$$cit is to increase future consumer lump$-$sum taxes $($T $0),$ but

leave the current consumer lump$-$sum taxes $($T $)$ unchanged. $($Hint: There are two

cases. Make sure that you show both cases.$)$

$($c$)$ A third group of economic advisers proposes to increase the future corporate taxes

$($x$0)$ : $($Hint: See Question $1$ of Exam $2,$ Winter $2021)$

$2$

Using a separate Y d$-$Y s graph for each advice, which advice should the government

take if its key goal is to reduce the current account de$$cit$?$ Brie$$y explain. Note that

you only need to show the goods market graph $($i$.$e$.$ Y d$-$Y s graph$).$ The labour market

graph is not needed.