1. Consider a 2x2 static general equilibrium model with a government (1 consumer household, 2 goods A and B and 2 factors of production capital - K and labor - L) of a simple closed economy and savings driven investment. The production functions of the two goods and the utility function of the household is of the Cobb-Douglas type. Share parameters of the utility function of both households 0.5 while production of good A is more capital intensive than production of good B. The household owns the endowments of K and L and the household saves a constant fraction of its income. Structure of government expenditure is 0.2 on good A and 0.8 on good B. Investment goods are produced using a Cobb-Douglas technology with shares of 0.8 on good A and 0.2 on good B. The government income is entirely derived from taxes levied on income of houeholds. Government consumption is fixed at the initial level and initially the budget is balanced (but the government can run a deficit or surplus if the revenues change). Consider a 20% increase in the income tax rate. Desribe the likely effects on:

   (a) government revenues and government budget (b) level of investment

   (c) production of goods A and B and their prices (d) utility of the household